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Gold Prices on Developments Out of Europe

June 19, 2012 - The spot price of gold stayed in the $1,630 per troy ounce range Tuesday morning where it has hovered all week. Stocks and other commodities were mostly flat ahead of the US Federal Reserve’s Federal Open Markets Committee Meeting. The two- day policy-deciding meeting begins on Tuesday and concludes on Wednesday with an announcement on US monetary policy.

Investors wait for the announcement from the FOMC and from developments out of Europe. The exuberance from the pro-bailout Greek election has subsided and the Euro has fallen back against the dollar. In Spain, the costs of borrowing rose over 5 percent for one year, up from 1.985 percent last month.

Despite a relatively successful bond auction, there is concern over the Spanish bond auction that will take place on Thursday. The benchmark Spanish 10-year yields eased after the auction but have remained over 7 percent as of midday Tuesday. The auction on Thursday is widely seen as the next leg of the story.

“It is not at all clear whether Spain’s rescue package will help bring about the definitive clean-up of its banking sector,” said Nicholas Spiro, managing director of consultancy at Spiro Sovereign Strategy, a firm specializing in sovereign credit risk.

“Spaniards, like the markets, fear the 100 billion Euro credit line is the prelude to a full bailout accompanied by much stronger conditionality.”

Despite the concern in Europe, the policy-decision of the Federal Reserve will have a more immediate impact on the gold market.

“I guess there’s a kind of wait-and-see attitude because there’s a lot of uncertainty in the market,” said Lynette Tan, investment analyst at Philip Futures in Singapore. “We expect policy decisions from the Fed to influence the gold price more than risk appetite linked to the Euro crisis.”

Chief US Economist at Goldman Sachs, Jan Hatzius, said, “We would be quite surprised if we saw no [Fed policy] easing this week.”

Hatzius added, “We believe that an extension of Operation Twist could well be insufficient on its own and could thus be followed by additional easing action before long.” Hatzius also suggested that the Fed could consider a “sufficiently large program” of purchasing mortgage-backed securities.

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Jonathan Monroe

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