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BofA Merrill Sees Gold at $2,000/oz. in 2012 on QE3

Release Date: 
Thursday, April 19, 2012

Gold prices were higher today as markets responded to disappointing U.S. unemployment data and rumors of a possible French credit downgrade. The precious metal traded at $1646.30 per ounce at 7:21 AM Pacific Time on the New York Spot Market with silver at $31.89 per ounce.

The four-week moving average for U.S. initial jobless claims increased to a seasonally adjusted 374,750, the highest level since Jan. 28, raising fresh questions about the strength of the U.S. recovery. "Another set of dismal economic numbers" which raises the possibility of a third round of quantitative easing, said Sterling Smith, analyst with Country Hedging. "Whenever that shows up, gold tends to catch a bit of a bid," he added. "Quantitative easing is the number one item that propels gold over the short term," Smith said.

Francisco Blanch, the head of commodity research at Bank of America Merrill Lynch Global Research, also expects another round of quantitative easing by the end of 2012. "The target that we have is still $2,000 for gold into year end," Blanch said.

"What gold does is give you protection in the case that you have another round of quantitative easing by the Federal Reserve," Blanch said. "The bottom line is that as the economy progresses into the year end we are going to see a major fiscal issue. If and when that happens, the support to gold is going to increase substantially here."

"The core house view here from Bank of America Merrill Lynch is that we see the U.S. economy slowing down...US GDP slowing 1% into the end of the year. I think as GDP slows down, you're going to have a response from the Federal Reserve. Particularly if the slowdown in GDP starts to reflect in the economic data, I think the Fed will definitely not wait to act. And when the Fed gives the first hints of a response into the fourth quarter, you will start to see some support in the gold market," Blanch said. He added, "we think that gold outright – just flat price of gold – will basically rise on that expectation of QE3. We see roughly $800 billion of QE3 going into year end."

"We still favour gold," Standard Bank said in a monthly report.

(Source: "PRECIOUS METALS: Gold Perks Up As Weak Data Fan Stimulus Hope," Wall Street Journal," April 19, 2012; "Gold up on bargain hunting, France worries," MarketWatch, April 19, 2012; "PRECIOUS-Gold subdued ahead of Spain auction," Reuters, April 19, 2012; "PRECIOUS-Gold slides towards $1,630/oz as euro slips lower," Reuters, April 19, 2012; "Blanch Says U.S. Fiscal Woes Will Push Up Gold," Bloomberg, April 18, 2012)

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