Are Investors Still Bullish on Gold?

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Data from EPFR Global, which provides fund flows and asset allocation data to financial institutions around the world, shows that investors placed more than $200 million into commodities in the week ending March 7.  However, investors placed $404 million into gold and precious metals funds.  Bloomberg explains, “Investors in gold-backed exchange-traded products added to holdings for a seventh consecutive week, taking the total to a record 2,408.4 metric tons valued at $132.7 billion.”  Even though nations such as China are trying to tame inflation and stimulus expectations, investors continue to seek wealth preservation in gold and silver as nations continue to engage in currency wars.

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Last week, Brazil’s central bank cut interest rates for the fifth consecutive time by reducing the benchmark Selic 75 basis points to 9.75 percent.  The prior rate cuts had been by 50 basis points.  Brazil President Dilma Rousseff said, “The reduction of interest rates by the Central Bank isn’t just to heat up the Brazilian economy.  I compliment the central bank because the broader intention is to align the internal rate with the international rate.”  She goes on to criticize the low rates and easy money seen in developed economies and says there’s a “huge bubble on the way.”

Although the European Central Bank did not cut rates last week, investors are focused on the bank’s exploding balance sheet.  Due to the European banks craving capital, the ECB pumped one trillion euros into the banks via cheap three-year loans, known as the long-term refinancing operation.  Now, the can has been kicked once again down the long and bumpy road of unsustainable debt.  The ECB’s balance sheet now exceeds three trillion euros and equals one-third of euro zone GDP.  Meanwhile, the Federal Reserve’s balance sheet represents about 20 percent of the GDP in the United States.

On Tuesday, the Federal Reserve’s policy-making committee will meet, but the outcome is unlikely to produce more stimulus measures.  Fed Chairman Ben Bernanke is more likely to discuss the current Operation Twist program and positive signs in the labor market.  Thus, gold and silver may be see more weakness in the short-term.  Currently, both metals are near key support levels.  However, with countries around the world competing to devalue currencies against each other, the longer-term picture in gold and silver remains bullish.