Gold Declines as US Stimulus Hopes Fade

on Aug 16, 2012

Although gold was set to gain on speculation that central banks may take more action to spur growth, the US retail sales, which rose more than forecast in July, dampened investors’ expectations of imminent stimulus from the US Federal Reserve and, consequently, drove gold prices down, Reuters reported on 14 August 2012. Meanwhile, supply concerns boosted platinum group metals (PGM), after Lonmin (LMI), the world’s third largest platinum producer, froze mining at its South African Marikana mine, after violence between rival unions killed at least nine people.

Gold price eased after positive US retail data prompted bullion investors to scale back their bets based on expectations about imminent Fed stimulus. Reuters reports that bullion went down by one percent, whereas spot gold dropped 0.7 percent.
The report, cited as the main reason for the gold downtrend, indicated that the July retail sales in the US rose more than forecast, Bloomberg reported on August 14. Sales improved by 0.8 percent, or the biggest advance since February and the first gain in four months, which followed a 0.7 decrease observed in June. In addition, the retail sales advance surpassed economists’ projections of a 0.3 percent rise. According to Reuters, demand climbed broadly, covering everything from cars to electronics, and indicating that consumers may drive faster economic growth in the third quarter.

!m[](/uploads/story/250/thumbs/pic1_inline.png)And while the report might be good news for the US economy as a whole, it weighed on the gold price, with chances of stimulus measures such as quantitative easing seen to diminish. “Better economic figures may make the Fed postpone or do away with additional stimulus,” noted George Gero, vice president of RBC Capital Markets, as quoted by Reuters. Nevertheless, analysts have not completely abandoned hope for stimulus measures, with most Wall Street economists expecting Fed action as soon as September following an annual meeting of economists and central bankers at the end of August in Jackson Hole, Wyoming.

And while gold decreased, platinum rose as much as one percent, outperforming gold, whereas palladium, another PGM, increased by 0.9 percent, as reported by Reuters. The PGM advance was largely due to supply fears, with PGM producer Lonmin shutting its South African operations after seven Lonmin workers and two policemen were killed in a dispute between rival unions. According to the company’s press release, production has been severely disrupted since August 10.

Nevertheless, according to UBS (UBSN), as quoted by the mining news website Mineweb, currently, the impact on PGM production is not sufficient so as to have a significant impact on platinum’s supply and demand balance. “But the risk of contagion across the South African platinum sector cannot be ruled out. Should the situation escalate further and spread to other major producers, a more significant platinum price response could be expected”, UBS said in a note. Platinum-producing companies operating in South Africa have been continuously struggling with a decline in PGM prices, safety issues, as well as labour disputes which in recent months have negatively affected output and profits.

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