Wednesday, August 10, 2011

Fed Will Push QE3 if Necessary & BoE Predicts Sluggish Growth

London Gold Market Report
from Ben Traynor
Wednesday 10 August, 2011

Gold and Stock Markets Up, Fed "Will Push QE3 if Necessary", BoE Predicts "Sluggish" Growth

THE DOLLAR gold price rallied to $1767 an ounce Wednesday morning in London – 0.6% off the previous day's all-time high – as stocks and commodities also rose following the US Federal Reserve's interest rate announcement on Tuesday.

Silver prices climbed to $38.67 an ounce – 0.9% up for the week so far.

"We believe the gold price will lose some of its recent strong upside momentum in the course of the coming days," says Axel Rudolph, technical analyst at Commerzbank.

"Nonetheless [we] maintain our medium term bullish outlook."

The gold price "should remain supported," adds David Thurtell, analyst at Citigroup.

"I think there are enough concerns about sovereign debts and weakening growth, that people will buy dips."

The US Federal Reserve confirmed Tuesday that it will keep its benchmark interest rate at historic lows between 0 and 0.25%, to "promote the ongoing economic recovery".

"The Committee currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013," said a statement from the Federal Open Market Committee.

The FOMC said it also discussed its "range of policy tools" – and is "prepared to employ these tools as appropriate".

"Bernanke will push through QE3 if the economic conditions warrant it," explains Steve Lear, deputy chief investment officer at JP Morgan Asset Management, referring to a possible third round of quantitative easing.

"We now see a greater-than-even chance that the FOMC will resume quantitative easing later this year or in early 2012," agrees Jan Hatzius, chief economist at Goldman Sachs.

Here in Europe, there remains a "massive overvaluation" of the Swiss Franc, according to a statement issued Wednesday by the country's central bank.

"The Swiss National Bank...is taking additional measures against the strength of the Swiss Franc," the SNB said.

"It will again significantly increase the supply of liquidity to the Swiss Franc money market."

The SNB says its aim is to boost by 50% the sight deposits – meaning deposits available for immediate withdrawal – that commercial banks hold with the central bank.

"With liquidity already ample in Switzerland [however], the Swiss authorities could be doing little morning than pushing on a string," reckons Jane Foley, senior currency strategist at Rabobank International.

The SNB last week cut its benchmark interest rate to "as close to zero as possible".

The Swiss Franc has risen 29% against the US Dollar since the start of the year. The Swiss Franc gold price was down around 3% for the year on Wednesday morning, while the Dollar gold price was up around 25%.

Here in the UK, the Bank of England cut its growth forecast for 2012 to 2% – down from 2.5% – adding it expects growth "to remain sluggish in the near term, reflecting the continuing squeeze on households' real incomes".

"The most likely outcome is for inflation to be a little below target in the medium term," it said in Wednesday's quarterly Inflation Report, although it added there is a "good chance" consumer price inflation will hit 5% by the end of this year.

The Bank – which has held its benchmark interest rate at 0.5% since March 2009 – has an official CPI inflation target of 2%.

Meantime in India – the world's largest gold bullion market – demand for gold was "slightly slow" on Wednesday, according to one jeweler in the southern city of Chennai.

Princeson Jose, managing director of Prince Jewellery, says people are waiting for the gold price "to stabilize".

"The spike in prices has made customers a little cagey, adds Bhadresh Shah, a bullion analyst in Mumbai.

The long term sentiment among traders remains bullish, however, Wednesday's Wall Street Journal reports.

In Dubai, by contrast, gold souqs report they are running out of gold bars and coins. Those dealers who still have gold have increased the premium they charge above the spot gold price by up to 650%, according to press reports.

Ben Traynor


Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

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