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Analysts Discuss Likelihood of Fed Twist or QE3

Release Date: 
Wednesday, June 20, 2012

Gold prices were lower on Wednesday as analysts awaited statements from Fed Chairman Ben Bernanke after the Fed's two-day meeting. Gold was $9.60 lower at 8:32 a.m. Pacific Time on the New York Spot Market, trading at $1,609.30 per ounce. Spot silver was $0.12 higher at the same time, trading at $28.64 per ounce. (Click here for the most current spot prices.)

Several analysts believe the Fed will extend so-called Operation Twist which is designed to "twist" the yield curve of bond yields by selling short-term securities while buying longer-term securities, sending long term yields lower. The hope is that investors will seek out riskier assets which provide higher yields, thereby stimulating the economy.

Credit Agricole CIB analysts said the Fed is likely to announce additional efforts to support the U.S. economy amid weak employment growth and weakness in manufacturing activity. "Our expectation of a modest extension of Operation Twist will disappoint those looking for strong action, resulting in a renewed increase in risk aversion and a firmer [dollar]," Credit Agricole analysts said in a note on Wednesday.

Barclays analysts also expect an extension of Operation Twist versus a more robust QE3. "This should be U.S.-dollar positive and somewhat risk-negative," the Barclays analysts said Wednesday in a note. "It's most likely we will get an extension to Twist and an 'open door' to further stimulus, but no QE3 as such," Andrey Kryuchenkov, an analyst at VTB Capital PLC, said.

Goldman Sachs and Societe Generale expect a far more aggressive quantitative easing announcement from the Fed. SocGen forecasted that the Fed will unveil a plan to expand its balance sheet by $600 billion in its third round of quantitative easing.

As markets closely monitor the Fed, analysts continue to cite long term trends that may continue to support gold. Will Rhind, head of US Operations for ETF Securities, said emerging market central banks including those of China, Mexico, and the Philippines have been buying gold while the world focuses on Europe and the Fed.

The growth of China's middle-class is helping support demand for gold in that country.

By 2020, middle-class wealth is expected to spread to 600 million people in third-tier Chinese cities, with a sizeable percentage investing in gold or buying gold jewelry.

"Inflation [in China] is high and there is a low chance to invest in property and little desire to participate in the stock market. But disposable income is rising and people want to protect their wealth," said Helen Lau, a senior metals and mining analyst at securities firm UOB Kay Hian.

(Source: "Emerging Markets Buying Gold as World Waits for Ben, Europe," The Street, June 20, 2012;

"PRECIOUS-Gold prices fall on caution ahead of Fed," Reuters, June 20, 2012; "Gold lower ahead of Fed policy decision," MarketWatch, June 19, 2012; "In Gold Market, China Sparkles as India Fades," Wall Street Journal, June 20, 2012; "China's growing middle class continues to dip itself in gold," June 15, 2012)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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