Daily Gold Update

Source: Dr. Bill Musgrave, American Gold Exchange

Austin— Gold slipped 0.5% as investors took profits from last week's 3.1% rally. The dollar rose from a four-month low, pressuring the gold price, as investors prepared for the possibility that Germany's Federal Constitutional Court may suspend the eurozone's primary bailout fund, the European Stability Mechanism, in a ruling expected later this week. Such a decision would gut the ECB's new plan to stabilize debt-strapped economies by purchasing their short-term bonds, and could threaten the viability of the euro itself. The dollar also picked up safe-haven inflows from reports that growth in China's industrial output dropped to a three-year low and its CPI rose for the first time in five months. Because gold is denominated in dollars internationally, a rising dollar makes gold more expensive for holders of other currencies. Silver tracked gold lower, dipping 0.2%. Platinum added 0.5% while sister metal palladium jumped 2.8% as labor disputes in South Africa cut supplies.

At the close: December gold slipped $8.70 to $1,731.80; December silver dipped 6 cents, to $33.63; October platinum gained $7.50 to $1,603.80; and December palladium jumped $18 to $672.75 an ounce.

For gold, much is riding on tomorrow's monthly meeting of the FOMC. Last week's gains were driven in part by Friday's weak non-payroll jobs report, which raised the odds that the Fed will undertake another round of quantitative easing. Bernanke declared in Jackson Hole ten days ago that QE3 is very much an option to lower the jobless rate, which he called a "grave concern." As Bloomsberg reports, a Citigroup gauge of market indicators for more monetary stimulus rose to 99% in August, and this was before Bernanke's speech and the latest jobs data. In 2010, during the months leading up to QE2, the same gauge only rose to 82%.

More easing would be bullish for gold because it devalues the dollar and increases long-term inflation risk, stimulating demand for gold as a safe-haven store of value. But whether or not QE3 is announced, the Fed is almost certain to extend its program of near-zero interest rates by at least another year, into mid-2015. In fact, the bond markets have already priced it in, according to Bloomsberg, which is very bullish for gold. Extending near-zero interest rates until 2015 all but guarantees negative real interest rates�that is, interest rates below inflation�for several more years, making gold more attractive than bonds and other interest-bearing investments.