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Gold Drops after QE3 Disappointment, Faber Says "Don't Trust the Fed"

Commodities / Gold and Silver 2011 Jun 23, 2011 - 01:14 PM GMT

By: Ben_Traynor

Commodities

Best Financial Markets Analysis ArticleU.S. DOLLAR gold prices continued falling Thursday morning in London, hitting $1538 per ounce – a 1.3% drop from Wednesday's high, and nearly back to where they started the week.

Stock and commodity markets fell and longer dated US Treasury bonds rose after US Federal Reserve chairman Ben Bernanke made no specific reference to QE3 – a third round of quantitative easing – at a press conference on Wednesday.


Silver prices fell to below $36 per ounce – just above where they began the week – having rallied late Wednesday.

"We reiterate that our consistent bullish view on gold is not reliant on QE3," says Marc Ground, commodity strategist at Standard Bank.

"The current environment of increased government borrowing...is sufficient to push global liquidity, a major causal driver of gold, higher," and should see gold prices maintain their longer-term upward momentum, he adds.

Gold prices have found it "a bit difficult to perform" over the last couple of days, reckons Ole Hansen, senior manager at Saxo Bank, adding that summer is "not a favorable time of year" for gold.

"[Now] QE3 is out of the question... Bernanke is in no hurry to raise rates and, at the same time, rising inflation is beginning to be a bit of a concern."

The Federal Open Market Committee voted Wednesday to keep its main policy rate of interest, the federal funds rate, between zero and 0.25%. It is likely to stay there for an "extended period", Bernanke told a press conference after the decision was announced.

The "headwinds" facing the US economy "may be stronger and more persistent" than previously thought, Bernanke said.

"Part of the slowdown is temporary and part of it may be longer lasting."

While QE2 will end as planned on 30 June, the Fed is "prepared to take additional action... if conditions warranted," Bernanke said.

"That the Fed and Bernanke didn't really allude to any future QE3...probably prevented gold from pushing higher and heading towards its record," says Darren Heathcote, head of trading at Investec in Sydney.

"A softer US interest rate market for longer means gold is more attractive and I guess there's a little bit of disappointment that wasn't the case."

However, Bernanke "will likely hint at QE3/interest rate caps" at August's annual global central banking conference, according to Bill Gross, head of PIMCO, the world's largest bond fund, which relayed Gross's prediction as a Twitter message.

Last year the Fed chairman used the event – held at Jackson's Hole, Wyoming – to announce that policymakers were prepared to make large scale asset purchases if economic conditions deteriorated. QE2 began a few months later.

Rather than announce a new round of asset purchases, Bernanke "may be considering leaving the $600 billion in liquidity in the market as long as possible," reckons Nomura chief economist Richard Koo.

"We do have a number of ways of acting...we could, for example, do more securities purchases and structure them in different ways," Bernanke told Wednesday's press conference, without elaborating on what those "different ways" might be.

"I keep on accumulating gold," says renowned investor Marc Faber, publisher of the Gloom, Boom & Doom report.

"Not to own any gold is to trust central bankers, and that you don't want to do."

Here in the UK, Sterling gold prices set a new record of £964 per ounce at Thursday morning's London Fix, following Wednesday's publication of minutes from June's meeting of the Bank of England Monetary Policy Committee.

The majority of the MPC judges "that the downside risks to the prospects for medium-term inflation had increased" since the start of May, according to the minutes.

The minutes also state that "further asset purchases might become warranted if the downside risks to medium-term inflation materialized."

By Ben Traynor
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

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.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


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