Early Friday, gold prices remained mostly flat. However, prices headed towards their third consecutive week of losses, the longest losing streak for the precious metal since October. Despite concerning economic reports, gold and silver seem to be sidelined for the moment.
According to a Bloomberg survey, 13 out of 26 analysts expect gold prices to increase in the coming week and four held a neutral stance, the lowest proportion in about two months. This comes a week after Commodity Futures Trading Commission data showed a 20% decrease in net long futures positions held by speculators. “Everything’s beginning to look as if it’s turning the corner, we’ve passed the point of maximum despair. A number of things which would have kept people with an eye on the upside for gold have now been neutralized. Gold can now settle back,” claimed an analyst at Royal Bank of Scotland.
Although some may believe conditions have been neutralized, consumers are feeling the effects of loose monetary policy. The cost of living in the United States increased in February by the most in 10 months. The Labor Department reported that the consumer-price index, which grossly under estimates real inflation, increased a seasonally adjusted 0.4% in February from the prior month. Compared to a year ago, consumer prices jumped 2.9%. Energy costs contributed much to the increase in living costs, with gasoline prices surging 6%, the biggest jump in more than a year. It is estimated that a 10 cent increase in the price of gasoline results in a decline of almost $12 billion in personal income.
Conditions have also not neutralized in regards to the nation’s budget. The Treasury Department recently reported that the US government ran a budget deficit of $231.7 billion in February, an increase from $222.5 billion a year earlier. The budget deficit for the first five months of the fiscal year hit $581 billion. Furthermore, the federal deficit is expected to top $1 trillion for the fourth consecutive year, as the Federal Reserve continues to keep interest rates at record lows. The government and financial markets are addicted to cheap money and the Fed is willing to be the Keynesian drug dealer. When investors fear inflation and counter-party risk, they turn to gold.
As governments become more desperate to maintain the status quo, they also turn to gold. Today, India’s Finance Minister Pranab Mukherjee said the country’s budget shortfall for the year through March 31 will be 5.9%, higher than the 4.6% target set last year. As a result, the government proposed a change in tax laws that could rake in billions of dollars in capital gains taxes. GoldCore explains, “India raised the gold import duty 90 percent and doubled the tax on silver as the government is struggling with a growing fiscal deficit and looked to increase revenues. Growing subsidies for fuel and food have left the government struggling to meet its budget target. Indian investors, who are the largest consumer group of gold in the world, rushed to buy gold in advance of the government’s plan to increase the 4 percent customs tax in April 2012.”
While gold and silver have struggled in March, this appears to be momentary breather from their decade long winning streak. Inflation and budget concerns still persist and more debt-based solutions will only add to the problem. Hayman Capital founder, Kyle Bass, recently said, “Call it what you want. Call it LTRO, call it quantitative easing, or any acronym that the powers that be want to call it. I call it money creation out of thin air, and therefore, gold has got a lot further to go.” As Treasury yields add to a weekly rise that’s the biggest since July, it appears that Fed officials will be doing the sweating,
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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com
About the Author
Eric McWhinnie is the chief commodities analyst at Wall St. Cheat Sheet. He has been an analyst at Wall St. Cheat Sheet since early 2010. He has worked at State Street and Waddell & Reed in financial advisory services and is also the editor of Wall St. Cheat Sheet's Gold & Silver Investment Newsletter and Commodities Investment Newsletters.