Muted Effect on Gold Prices after a Month of QE3

on Oct 1, 2012

Gold seems to have become stuck in a range between $1,740 and $1,785 an ounce despite Ben Bernanke’s launch of a third round of quantitative easing. Is the rally over or are investors just waiting for more apocalyptic news before they phase back into gold buying?

According to the MarketWatch, QE3 has given the precious metal less of a boost than may have been expected because gold traders have long anticipated the monetary stimulus and have adjusted accordingly. “…investors recognize the implications of positioning ahead of stimulus programs as there is a market boost after the central bank’s bid hits the market,” commented John Kicklighter, chief currency strategist at “And, since this is the third iteration of QE specifically, people are even more aware of the impact so they try to position ahead well in advance.”

Gold rose by 8 percent in August, followed by a 2 percent increase in September after the Fed started buying mortgage-backed securities in an effort to help the US economy. The recent halt in the rally can be put down to a number of reasons, including the nature of QE3 –carried out systematically in monthly $40 billion injections for an unlimited amount of time. This gives investors some timeframe to see the real economic effects of the stimulus and determine whether they want to stock up on their doomsday supplies of the precious metal.

!m[](/uploads/story/495/thumbs/pic1_inline.png)It is not only the printed money injected in the economy that is expected to support gold prices for a while. In longer terms the most significant driver of commodity returns has not been changes in the dollar or the absolute level of inflation but the level of real-interest rates. This is explained by the fact that in an environment of high interest rates, the opportunity cost of holding gold in the form of foregone interest is significant. When the interest rates are low, gold becomes the biggest beneficiary. With the Fed announcing it intends to hold rates between zero and 0.25 percent at least until mid-2015, investors are given a two-and-a-half year layout on US’ monetary policy.

Another reason for the stable gold prices is the weakened physical side of demand in the market, which is curbing the precious metal’s price despite recent signs of recovery. “The one part of the puzzle that’s still largely absent is a stronger pick up in Indian demand,” Credit Suisse analyst Tom Kendall said. “We’ve seen a bit of an upturn as the rupee has strengthened, but we’re still waiting for that market… to come back into gold in more sizeable volume.” The fourth quarter in India is expected to see increases in the demand for gold with the festival season under way but a significant upturn will only take place in the event of a sustained recovery of the rupee.
According to Dave Govett, head of precious metals at Marex-Spectron, gold currently lacks the appetite to surge on its own and it would take other markets to help it break away from the $1,785 ceiling. Mr Govett remains in favour of buying in during dips in the market and expects a renewed assault on $1,800 not too long from now.


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