Continued cautious tone towards global economy and core currencies support gold prices, says Sharps Pixley

London precious metals broker Sharps Pixley says that continued uncertainty around the strength of global economic recovery, allied with central bank purchases of gold, point to continued support for the price of the metal.

Equities and High Yield Shine Despite Cautious Tone towards the Economy

The executives at the World Economic Forum at Davos last week were cautiously optimistic about the world economy despite the fact that the S&P 500 index is just 3.66% below its 2007 peak of 1,565.15 while the Dow Jones Industrial Average has surged to a five-year high.

The December US durable goods order rose 4.6% compared to the expectation of 2%. Corporate earnings in the US have continued to beat expectations. The 10-year Spanish government bond yield has dropped 250bp since the peak reached in July 2012. Global junk bond yields have continued to decline.

On the other hand, the consumer confidence in the US declined more than expected in January to 58.6 from 66.7 in December, reflecting the impact of the higher payroll taxes. The economies of Japan, Europe and the UK are still shrinking. Policy makers’ caution towards the economy suggests that the stimulus measures are unlikely to be taken away anytime soon, which will support gold prices.

Central Bank Keeps Buying Gold While Investors Sell ETFs

Bloomberg reported that the gold-backed ETP holdings fell 22 metric tons from the 20 December peak to 2,610.272 metric tons on 27 January.

As the economy recovers, investors’ appetite for gold may have decreased. On the other hand, according to GFMS, the world central banks bought 536 metric tons of gold in 2012, the largest increase since 1964. The IMF reported that Russia’s gold reserves rose 2.1% in December and 8.7% in 2012.

Kazakhstan’s gold reserves jumped 1.7% in December and a whopping 41% in 2012. Turkey’s gold holdings rose 84% as domestic banks deposited gold at the central banks. Given that the sovereign debt crises are still haunting the US and Europe, central banks in emerging countries will continue to add gold on top of the traditional reserve currencies.

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