The Bullion Report For February 1, 20...

The Bullion Report For February 1, 2012: To the moon Alice

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Since: Feb 12

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#1 Feb 2, 2012
How many remember that classic phrase from the Jackie Gleason’s “The Honeymooners”? That vintage TV sitcom has been a perennial favorite of many generations and still plays well during marathons and late night airings. With the Chinese Lunar New Year now over and with the end of the first month coming to a close this week, gold prices are up over $175 so far in 2012. What signal is that conveying? Does it indicate that gold prices will continue to advance? Could any of them justify a Gleason-like prediction “to the moon Alice, to the moon”?

So far in 2012 precious metal prices have risen faster than most other investment sectors. While a rising trend requires fresh buyers to maintain momentum, precious metals seem poised to entertain that type of thrust from a variety of sources. Chief among stimulants for increased precious metal investment demand is monetary policy. Since the global economic collapse in 2008, the central banks of the world have aggressively embarked on an unprecedented policy of easier money. Even the quantitative easing efforts by the Federal Reserve serve to accomplish this, but all also have the effect of increasing the supply of fiat money. While accepted as suitable policies to stimulate the global economy, these methods also have the power to inflate.

Somewhere in the neighborhood of 10 trillion dollars have been created as a result of these efforts. Yet, the global financial markets continue to not respond with solid growth. It is only a matter of time before those same policies erupt in inflationary forces.

A good example of this was when metals received an assist in their ability to attract buyers following the Fed’s press conference last week. During that conference, Ben Bernanke gave the nod to low interest rates remaining in force until 2014. Additionally, hints were supplied that provided another Quantitative Easing (QE) plan may be in the works. As a result, metal prices soared, with gold gaining $68 for the week. With that in mind, just think: with Chinese buyers celebrating New Year physical buying was less active. What might happen once they return?

The monetary policies being employed by the Fed are viewed by the financial community as accommodative and generally supportive for higher commodity values, including precious metals. Announcing their intention to extend the time frame through which the Fed plans to keep interest rates at record lows provides traders with a renewed incentive to invest in commodities. Low interest rates also apply pressure on the US dollar relative to other currency exchange rates. A weaker dollar tends to support higher commodity prices, as well as generally create a “risk on” atmosphere, not only for commodities but other assets that benefit from the promise of better returns.

Economic indicators suggest that the US economy is showing constructive signs. Not that the economy is booming, but suggestive of a positive trend that may be “better than expected.” The 2011 4th quarter GNP growth was reported to be running at 2.8%, the highest since mid-2010. Housing data, typically a very influential component of the US economy, has been running more favorably than previously predicted. While unemployment is still a major issue, especially true with the presidential election campaign about to shift into high gear, there have even been a few encouraging signs seen among the jobless numbers. All in all, the US economy shows resilience and improvement rather than signals of a double dip recession on the horizon.

At the same time the Euro zone crisis seems to be tapering off. The extent of the problems with sovereign debt issues have received encouragement from reports that Spain and Italy are actually finding buyers for new bonds.

Now let’s look at China as a factor. As pointed out in a previous article, the Chinese traditionally buy gold as presents for gift-giving in the Lunar New Year.

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