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Thoughts on Gold, China and QE

Gold prices took a hit yesterday after China announced that it was raising the country’s interest rates but Brian Hicks, co-manager of our Global Resources Fund (MUTF:PSPFX), doesn’t think this is the end of gold’s run. In fact, we’ve already seen a slight rebound in prices today.

Just after the China news was released, Brian spoke with MineWeb’s Geoff Candy to discuss how the change in interest rates may affect gold and commodity markets.

How does China raising their interest rates impact gold?

It all falls back on what they call the risk trade and with China raising their rates that puts a damper on so-called risk trade where investors go out and buy assets above and beyond simple Treasuries – whether it’s equities or commodities and we’re seeing that today – people moving into cash and out of gold.

Brian also shared his outlook on gold and what may be the biggest drivers and constraints going forward.

What is U.S. Global’s view of where we’re going to be looking 12-18 months out?

We’re very constructive on the price of gold over the next 12-18 months and it’s really not dependent upon what we’re seeing on the macro front, other than if we do see further concerns about deflation and slack in the labor market. We think that will be bullish for gold simply because we see further quantitative easing, more fear and concern about debasement of the U.S. dollar which will drive fund flows into gold.

However, if we do get a turnaround in the economy and things pick up, we feel like there'll be concern about inflation starting to advance at a quicker pace when we have virtually zero percent short-term interest rates that's going to catch people off guard and we could see further flows into gold as people try and hedge themselves against a run up in inflation.

In our mind at least, this is a perfect storm if you will, for the price of gold and our near-term target for year end is approximately $1,400 and for 2011 it had been $1,500 but at least at this point that looks somewhat conservative and probably could go up.

Brian also discusses the effect of gold producers closing their hedge books and anticipation of further quantitative easing measures from the Federal Reserve. You can listen to the full interview at MineWeb by clicking here.

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Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.