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Gold Pushes Higher on QE3

US Federal Reserve Chairman Ben Bernanke ended weeks of speculation about the prospect of further monetary stimulus for the United States economy, announcing on Thursday a third round of quantitative easing (QE3). 

The Fed said it will start buying $40 billion worth of mortgage debt each month, starting this Friday, as it seeks to boost economic growth and reduce unemployment.

The market’s reaction was swift and overwhelmingly positive, especially for precious metals, which act as a hedge against the inflationary pressure brought about by QE measures, which increase money supply. Gold for December delivery rocketed to a seven-month high of $1,775 an ounce — $240 higher than a 2012 low reached in May. Before the announcement, December gold futures were at $1,727.40, a difference of $47.60. Spot gold reached a high of $1,770.10 before slipping back slightly to close the trading day at $1,767.20 per ounce.

Silver also had a dramatic spike, heading over a dollar higher to $34.46 within minutes of the announcement, against the $33.31/oz spot price close on Wednesday.

Major gold producers enjoyed a significant lift in their stock prices. The NYSE Arca gold producer index rose 4.1 percent, its highest level since February. Goldcorp (NYSE:GG,TSX:G) climbed 5.4 percent to close at $45.41 in New York on double average trading volumes. Number one gold producer Barrick (NYSE:ABX,TSX:ABX) was up 4.8 percent, Yamana Gold (NYSE:AUY,TSX:YRI,LSE:YAU) leapt 6 percent and Newmont Mining (NYSE:NEM) vaulted 5.5 percent.

Issuing a statement at the end of a two-day meeting, the Federal Open Market Committee said it will continue to purchase mortgage-backed securities as long as the labor market does not substantially improve. Bernanke has called the US employment rate, stuck above 8 percent since February, “a grave concern.”

The Fed also said it will extend low interest rates until the middle of 2015 and will continue Operation Twist, a program that involves the Fed swapping $667 billion of short-term debt with longer-term securities in order to lengthen the average maturity of its holdings.

So how high could gold go? Kitco quotes Frank Lesh, a trader and futures analyst at FuturePath Trading, as saying that the Fed move, being inflationary, “is supportive for the gold market” and could keep gold rallying for a while. However, Lesh also believes profit taking could occur soon now that the highly-anticipated QE3, along with the European Central Bank bond purchases announced last week, has occurred.

“There’s been a lot of money made in gold recently. People will take their profits on the move. There will be a pullback at some point. It’s always hard to say exactly when that happens, but it will happen,” Lesh said.

Labor unrest continues at Gold Fields mine

Labor unrest continues at Gold Fields’ (NYSE:GFI) KDC gold mine in South Africa, with operations suspended due to “an unlawful and unprotected strike” started on Sunday night by the company’s roughly 15,000 employees. The east section of the mine, which was on strike last week, was operating normally, the company said in a press release. The workers are demanding the removal of their local union leadership and are asking for tax-free bonuses, The Australian reported. The prospect of strikes crippling the South African mining sector, which accounts for 20 percent of GDP, was apparent this week with a strike at Lonmin now dragging on for a month and just a handful of platinum miners turning up for work on Monday. The strike turned ugly last month when police fired on workers, killing 34, in what is surely one of the bloodiest incidents in the country since the apartheid era.

China imported more gold this year than ECB

Those who theorize that the Chinese yuan could replace the US dollar as the world’s reserve currency had more credence added to their argument this week with a record amount of gold being imported into the country via Hong Kong. Zero Hedge reported that year to date, China has imported more gold than the European Central Bank’s 502.1 tons of bullion holdings.

Significantly, Zero Hedge notes that for the first time in history, China has imported twice as much gold as it has “imported” [meaning purchased] US Treasuries. That, combined with strong demand for the yuan and less demand for the dollar due to China’s resiliency to the financial crisis compared to the United States, makes a strong case for the idea that the yuan, backed by gold, will replace the dollar. “The financial crisis that started in 2008 has provided China with a good opportunity to promote the yuan as a global currency,” according to the deputy director of the Chinese central bank quoted by Zero Hedge.

Meanwhile, in Russia suspicion that President Vladimir Putin is seeking to use gold as an alternative currency rose after the World Gold Council reported that Russia has doubled its gold reserves over the past five years. Gold purchases by the federation have exceeded 500 tonnes, the largest increase in central bank gold reserves, leading to speculation about how the widely distrusted Putin plans to use the stockpile.

Company news

Great Basin Gold (AMEX:GBG,TSX:GBG) suspended operations Tuesday at its Burnstone mine near Balfour due to an “inability to continue funding the working capital required by Burnstone to achieve cash flow breakeven,” the company stated. Burnstone is seeking an estimated $30 to $40 million in shutdown costs along with $1.2 million per month for care and maintenance.

British miner Cluff Gold (LSE:CLF) said on Wednesday that it has signed an agreement with Samsung Construction & Trading (C&T), whereby the Korean conglomerate will provide US$20 million in funding in exchange for access to Cluff’s gold supply. Samsung will buy gold from Cluff’s mine in Burkina Faso at a 2.25 percent discount to the gold price on the day before delivery.

Onexim Group, which indirectly controls about 37 percent of Polyus Gold International, Russia’s largest gold miner, is rumored to be selling its stake in the company. ”Onexim … confirms that it is in preliminary discussions, regarding a possible sale of some, or all, of its interest in Polyus Gold, with two potential purchasers in respect of an interest of less than 20 percent each in Polyus Gold,” Onexim, run by Russian tycoon Mikhail Prokhorov, said in an email to Reuters.

Junior company news

Helio Resource (TSXV:HRCreleased a preliminary economic assessment for three targets at its SMP gold project in Tanzania. The PEA allows for a base case of 500,000 ounces production with a net present value of US$85.7 million, or an upside outcome of 800,000 ounces (NPV of $146.1 million) if a 55-degree pit wall angle is viable. An earlier estimate shows 1.02 million ounces of gold in the measured and indicated category and 240,000 ounces inferred. Helio closed up 28.5 percent on Thursday.

Adventure Gold (TSXV:AGE) doubled its land position by acquiring 51 claims near its Val-D’Or East project in Northwestern Quebec, Canada. ”With this acquisition, Adventure Gold secures a very strategic and prospective land position adjacent to the Company’s flagship Pascalis-Colombiere property where we are currently discovering and defining new gold resources around the former Beliveau gold mine,” the company stated on Wednesday.

Paramount Gold and Silver’s (TSX:PZG,NYSE:PZG) Sleeper gold project in Nevada could produce an annual 172,000 ounces of gold and 263,000 ounces of silver, according to the final PEA filed on the project. The report concludes that the open-pit, heap-leach operation would process 81,000 tonnes per day for a minelife of 17 years, with total life-of-mine capital costs estimated at $688 million. Paramount is focused on developing its assets in Nevada and Mexico.

Securities Disclosure: I, Andrew Topf, own stock in Goldcorp. 

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