The risk remains that the Fed could disappoint in the size of QE


The dollar has been strengthening against the euro and also on a trade-weighted basis since Friday afternoon following statements by the Fed regarding its view on the US economy and the need for further quantitative easing (QE). However, the market focus has shifted from whether more QE will take place to how much QE is in the offing. We believe that the gold market is pricing quantitative easing of $500bn (based on the gold price’s strong casual relationship with global liquidity and the Fed’s balance sheet). We believe that a figure less than $500bn could see the gold price decline.

US break-even inflation (as derived from US bond yields) is still rising. The bond market is pricing low inflation for the next two years, rising steadily towards and average inflation rate of 2% over the next 10 years. The 10y breakeven inflation rate is now just above 2%. The 5y breakeven inflation is at 1.6% and 2y breakeven inflation at 1%. If the average inflation rate over the next two years in the US is going to be 1% (as priced by the bond market) and the US Fed implicitly targets 2% inflation, we expect interest rates to remain low for the entire 2011 and possibly 2012. Last night the futures market assigns a probability of 82% of no rate increase until at least Sep'11. Low rates and rising liquidity are positive for gold.

Short term, we believe that dips in the gold price will be bought by seasonal jewellery demand in the run-up to Diwali (which ends 5 November). At the same time, we have the FOMC meeting on 3 November which is keeping investment interest alive. We remain cautious on gold post- 5 November. The risk remains that the Fed could disappoint in the size of QE which may be amplified by seasonal jewellery demand which should fall away in November.

Comments

Post a Comment

Popular posts from this blog

Gold edges up on weaker dollar, dovish U.S. Fed policy bets

Image
 Gold edged higher on Monday, helped by a weaker dollar and expectations that the U.S. Federal Reserve will reiterate its dovish monetary policy stance this week. Spot gold was up by 0.1% at $1,943.58 per ounce. U.S. gold futures rose 0.1% to $1,950.10 per ounce. “Gold is firm on the basis that the Fed could adopt a further dovish message with respect to average inflation targeting,” said Michael Hewson, chief market analyst at CMC Markets UK. “If you want to have a policy of average inflation targeting, you’re going to have to go into detail as to how you are going to arrive at that particular outcome.” The dollar retreated on Mond ay, bolstering gold’s appeal for investors holding other currencies, ahead of the Fed’s policy decision due on Wednesday. “If inflation forecasts remain at 2% or below, this could offer gold a tailwind as the zero-yielding metal thrives in a low-interest rate environment,” said FXTM analyst Lukman Otunuga. Market participants are also waiting
Read more

Gold Price Futures (GC) Technical Analysis – Trader Reaction to Minor 50% Level at $1954.80 Sets the Tone

Image
  Gold futures closed lower on Thursday but up from its low of the session as investors battled a number of factors including U.S. economic data and outside market influences. Earlier in the session, gold fell over 1%, as positive economic data elevated hopes for a quick recovery while dampening the investment appeal of the precious metal. On Thursday, December Comex gold futures settled at $1937.40, down $11.60 or -0.60%. On the data front, a drop in U.S. jobless claims reported Thursday and positive manufacturing data reported earlier in the week are taking some shine off gold. A weaker Euro is also weighing on dollar-denominated gold by driving up thU.S. Dollar Index. U.S. weekly jobless claims fell below 1 million last week for the second time since the pandemic started, but did not signal a strong recovery in the labor market because the drop largely reflected a change in the methodology used to address seasonal fluctuations in data. Earlier in the week, a report s
Read more

India, not Trump, is the real reason behind the crash in gold prices

Image
If you have been puzzled about the crash in gold prices after Donald Trump's election, you are in the company of almost every analyst and media outlet in the western world. Gold and silver are a major part of the research at The Arora Report. A combination of our proven precious metal algorithms, extensive resources and knowledge of the emerging markets led us to alert subscribers to The Arora Report early that gold was about to crash and the reason behind it. Immediately after the election, the net position of The Arora Report in gold, silver and miners has been short as part of a sophisticated strategy.
Read more