By Nina Lu at fastmarkets.com
The US Federal Reserve’s third quantitative easing programme (QE3) will continue to support the gold price for as long as central bank retains it, Macquarie said.
But unless the Fed makes a substantial U-turn on the programme – although it is committed to purchasing $85 million in bonds per month indefinitely, chief Ben Bernanke on Wednesday outlined a timetable for its reduction and ultimate removal – it is unlikely to provide a medium-term bull case for the yellow metal, the bank said in a note on Friday.
“That we believe QE will continue longer than Bernanke predicts should provide some support to gold and silver prices, especially in periods when the US economic data becomes more bearish. But it is unlikely to provide a medium-term bull case for gold, given the eventual end for QE is still in sight,” it said.
Gold and silver prices plummeted after Bernanke said on Wednesday that he expected QE could be reduced in the second half of 2013 and could end in the middle of next year given the US’ improved economic outlook.
Spot gold dropped as low as $1,286 per ounce this morning, its cheapest since September 2012, had its biggest down day since the April price collapse on Thursday.
The Federal Reserve, which has linked the longevity of QE the performance of the US economy – specifically, the jobless rate – has revised its forecasts upwards.
Bernanke indicated that US GDP growth will be between 2.3 percent and 2.6 percent in 2013, with the unemployment rate seen falling to 6.5-6.8 percent next year from 6.7-7.0 percent previously. The forecast for 2015 unemployment is now 5.8-6.2 percent.
But Macquarie thinks that Bernanke’s forecasts are too bullish – it believes that both tapering and the ultimate end of QE are further away than the Fed chief predicts.
Two factors – real interest rates and inflation – are theoretically linked to QE and the gold price but neither is very supportive if QE comes to an end, Macquarie argued.
“The argument is that a key aim of QE was to lower long-term bond yields, and low bond yields support higher gold prices as they reduce the opportunity cost of holding gold (which pays no interest),” it said, “Rising real rates do not augur well for the future gold price.”
If the economy returns to normality slowly, more outflows from gold exchange-traded funds (ETFs) – the most liquid element of the physical gold investor market – are likely, the bank said.
Holdings backing the GLD gold ETF in New York are just below 1,000 tonnes, down from a peak of 1,353 tonnes in December last year.
How long the selling of ETF positions endures could determine how quickly and steadily the US economic data improves, Macquarie added.
(Editing by Mark Shaw)
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