Gold Price Rises as BOJ Floods Market

Thursday, March 17, 2011 8:01 am EST

GOLD PRICE NEWS – The gold price rose back above $1,400 per ounce Thursday morning as risk appetites expanded across the globe. The heavy selling pressure that has engulfed stocks, commodities, and gold is abating this morning. The gold price, which has slid 2.3% over the past ten trading days, has seen sever price swings amid the heightened volatility in the financial markets.

Turmoil in Japan, violence in the Middle East, and continued sovereign debt concerns in Europe all have weighed on asset prices of any and all ilk. While the gold price held firm yesterday, the Dow Jones Industrial Average (DJIA) tumbled 242.12 points, or 2.0%, to 11,613.30. In doing so, the Dow Jones cut its year-to-date return to just 0.3%, while the S&P 500 turned negative thus far in 2011.

Unlike the gold price, shares of gold producers and explorers plummeted along the sell-off in the broader equity indices. The AMEX Gold Bugs Index (HUI), a composite of the world’s largest gold companies, retreated 2.2% to 522.73. The Market Vectors Junior Gold Miners ETF (GDXJ), a basket of small- and mid-cap gold companies, slid 1.7% to $35.03 per share. Notable decliners included Goldcorp (GG), IAMGOLD (IAG), and Royal Gold (RGLD). GG, IAG, and RGLD finished lower by 1.4%, 3.2%, and 2.1%, respectively.

Although the gold price has held up particularly well compared to other asset classes as the Japan crisis intensified, it remains lower by 1.6% year-to-date. From its $1,445.70 record high, reached last week, the gold price is now lower by 3.3%. Gold equities have fared considerably worse, with the HUI having declined 8.8% in 2011.

Commenting on the outlook for the gold price, analysts at Barclays Capital wrote that if the yellow metal breaks below $1,390 per ounce, “We would look to buy any dips toward support in the $1,325 area.” Barclays did note, however, that it remains positive on the gold price over the longer term. “A close back above $1,405 would encourage our bullish view, although breaking above $1,435 is needed to confirm new highs through $1,445.”

Looking ahead over the balance of the week, the gold price is likely to continue to be driven largely by the crisis in Japan. On Wednesday, Steven Chu, the U.S. Energy Secretary, stated that explosions at the Fukushima Daiichi nuclear-power plant in Japan “actually appear to be more serious than Three Mile Island,” the 1979 nuclear meltdown near Harrisburg, PA that led to a freeze on the construction of nuclear plants in the United States for three decades.

Across the Atlantic, Guenther Oettinger, Energy Chief of the European Union, told a European Parliament committee that “In coming hours there could be further catastrophic events which could pose a threat to the lives of people” in Japan.

While the gold price may face pressure as investors are forced to raise cash amid the Japanese crisis, the response of policymakers in Japan suggests a significant tailwind for the price of gold. In just the past week, the Bank of Japan (BOJ) has injected over 55 trillion yen (approximately $700 billion) into the nation’s financial system. This level is now greater than the $600 billion from the Federal Reserve’s second round of quantitative easing (QE2). Moreover, if the nuclear crisis intensifies and Japanese financial markets decline further, the level of money printing could reach unprecedented proportions.

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Posted by jturbin on Mar 17 2011.

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