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Analysts Still Expect QE3 Despite Fed Inaction

Release Date: 
Friday, June 22, 2012

Gold prices rebounded today following Thursday’s selloff after the Federal Reserve failed to announce a new round of quantitative easing following its meeting this week. Gold was $2.50 higher at 7:04 a.m. Pacific Time on the New York Spot Market, trading at $1,568.70 per ounce. Spot silver was unchanged, trading at $26.98 per ounce. (Click here for the most current spot prices.)

IG Markets said in a research note that Thursday’s declines were triggered by weaker economic data and a "hangover persisting" amid disappointment that no quantitative easing was announced by the Federal Reserve following its policy board meeting Wednesday. "We saw soft manufacturing numbers from Germany, China and the U.S. flagging economic growth concerns further. The US dollar rallied against its peers, as investors shunned risk," IG said in the note.

Data yesterday showed euro-area manufacturing shrank at the fastest pace in three years while a Chinese manufacturing gauge also showed a contraction. More Americans than expected filed for jobless benefits as manufacturing in the Philadelphia region shrank and sales of existing homes fell.

Several analysts believe the Fed is getting closer to providing additional liquidity in the form of quantitative easing. "Global financial market risks abound and remain a threat to U.S. economic growth," Nick Moore, the head of commodity research at Royal Bank of Scotland Group Plc in London, wrote in a report. "While the Fed has decided against outright balance sheet expansion for now, there are signs that the committee’s views are moving closer toward the threshold for QE3. Such a development would clearly benefit gold."

Natixis analyst Nic Brown said "the one thing that will support prices this year is the potential for further aggressive monetary stimulus in the United States, whether it is QE or a new policy." Brown said while the Fed had chosen not to pursue aggressive stimulus measures, poor economic data from Europe, China and the United States on Thursday suggested continued pressure for some sort of action to stimulate growth. "The Fed may be forced into doing something," he said. "The fundamentals in the U.S. may be improving ... but the European situation is managing to drag everyone else down with it."

"The recent sell-off (in gold) could well prove to be excessive ... if risk aversion rises again in the coming months," investment bank Fairfax said in a note.

Central bank buying continues to be a positive factor for gold markets. Russian newswire Interfax reported a 15.6 ton rise in Russia's gold reserves in May.

(Sources: "Gold Seen Cutting Weekly Drop As Europe Woes Spur Demand," Bloomberg, June 22, 2012; "CORRECTED-PRECIOUS-Gold recovers after biggest 1-day drop since Feb," Reuters, June 22, 2012; "Gold remains on weak footing," MarketWatch, June 22, 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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