Gold Hits Two-Week High after Central Bank Shenanigans Continue

Gold climbs to the highest price in two weeks during speculation that central banks will take more action to spur "growth," boosting demand for the metal as an inflation hedge.

Here I sit alone writing on a U.S. holiday. Why you might ask? Because I care that much about the precious metals market! Okay that and the next time you make a joke to your wife about one of her friends, you BETTER be sure her friend is not coincidentally concurrently suffering from a terrible automobile accident that you really didn't know about.

Moving on, it's about time certain stars aligned for the best for precious metal investors. Earlier we mentioned that the euro and news from the euro-zone in general had a positive correlation with the price of gold. As the debt nightmare continued in the battered zone, gold prices fell accordingly and any mention of a potential easing aided the yellow metal. The same generally held true for news from the U.S. and its ambiguous forecast for a QE 3.

This time we have talk of quantitative easing occurring SIMULTANEOUSLY in both Europe and the U.S., which seems to have a 'sky-rocketing' effect on gold. Reports on Tuesday showed that euro-area manufacturing output contracted for an 11th straight month in June and manufacturing in the U.S. unexpectedly shrank. European Central Bank officials are forecast to cut their main interest rate to an all-time low on July 5, according to the median forecast in a Bloomberg survey of economists.

According to a telephone interview with Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago, "People are expecting some form of easing both in the U.S. and Europe. The chatter is growing louder." And it doesn't just end there - there is market conjecture about further monetary accommodation from central banks in a number of the world’s other key economies, including the Bank of England and People’s Bank of China. Heck, although I don't tend to cover futures, last night gold futures on the Shanghai Futures Exchange kept rising from investors' expectations for central banks to release fresh easing policies this Thursday, in order to stimulate the global economy.

The reason I bring up multiple central banks and their discussion of quantitative easing is that this behavior has sparked bullish gold markets before. The metal may only be up 3.5 percent this year, but to give you an idea of just how much easing-talk seems to influence the yellow metal, prices jumped 70% from the end of December 2008 to June 2011 as the Federal Reserve kept borrowing costs at a record low and bought $2.3 trillion of debt in two rounds of so-called quantitative easing. Not a bad gain in my humble opinion.

“Stimulus, stimulus and stimulus,” said a research note from RBC Capital Markets. “The worse things get, the lighter the light at the end of the tunnel.” I couldn't agree more.

Naysayers on the other side of the fence are claiming that the recent jump in gold prices were solely due to traders scrambling ahead of the 4th of July holiday with short covering; i.e. buying to offset positions in which traders previously sold. One can't be too sure about this, but with prices clearing the prior 'psychological' resistance level of $1,600, those of us in the long term trading game, may do well to stock up a bit more before a potential run to $2,000 occurs by the end of the year.

As for you short term bugs out there, I will be paying very close attention to the European central banks' verdict this Thursday for my shorter term portfolio and it would behoove you to do the same as well.

Be safe, be wealthy and above all else, be happy. Oh, and Happy 4th!

- Mitch

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