January 31, 2012
The Street
By Alix Steel
January 31, 2012
NEW YORK (TheStreet ) -- Gold prices were moving higher Tuesday along with the euro as investors cheered a tighter fiscal pact from the European Union.
Gold for February delivery was up $15 at $1,746 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,747.70 and as low as $1,729.50 an ounce while the spot price was adding $14, according to Kitco's gold index.
Silver prices were rising 44 cents at $33.97 an ounce while the U.S. dollar index was down 0.1% at $79.05.
Momentum traders were piling into gold, says George Gero, senior vice president for RBC Capital Markets. "Traders [are] seeing higher moving averages and higher open interest for the month."
Gold was also tracking the euro higher as 25 of the 27 nations in the European Union signed onto a tighter fiscal union. The European Court of Justice would be able to impose fines on countries who didn't stick to their budget deficits. All countries will be required to shrink their debt to 60% of Gross Domestic Product. These guidelines had been in place earlier, but the fine represents a big step towards being able to enforce the rules. The Financial Times also reported that European banks might tap the European Central Bank for almost 1 trillion euros in its next auction, more than double what banks accessed in December.
The European Central Bank has already seen its balance sheet expand 27% since September, and these big three-year loans at low interest rates will continue to ramp up the money supply in the system. The euro was moving higher, however, as these steps helped calm investors' worries over short term funding needs.
Longer term, any inflation expectations should be good for gold as the hard asset does well as paper currencies lose value. The question is whether or not the money is making it out into the actual money supply.
The M2 supply in the U.S. for example -- money in circulation plus checking, savings and travelers checks -- has grown 28% since the beginning of 2008 but banks are still keeping $1.5 trillion in excess reserves stashed at the Fed, which explains the lack of inflation in the U.S.
"Ultimately it can matter," says Leo Larkin, metals and mining analyst at S&P Capital IQ, "if the economy gets better and the money starts to be lent." Larkin has not changed his price target for gold in 2012 despite the Federal Reserve's recent action of keeping rates low until the end of 2014.
Larkin thinks a spike to $1,900 an ounce is a possibility but that gold could head sideways for most of the year to work off any overbought conditions. "Gold is up 11% and we are barely through the first month of the year ... [it] has to come up for air." His more conservative price target of $1,900 compared to other analysts is still a 21% increase from where prices started the year.
The game changer for Larkin, where he would revise his target higher, would be an "acceleration in growth of the monetary base more than we have seen," meaning that if the economy gets better, banks will start lending their excess cash and the velocity of money in the U.S. will pick up. The result could damage the U.S. dollar and lead investors into the safety of gold. "Gold is a hedge against what [investors] think will be continued depreciation of currency." As investors lose faith, Larkin says they will turn to gold.
