2011-06-09

Low real interest rates support a higher gold price


The latest signal from the US Fed, via Mr Bernanke, is that the US Fed funds rate could remain low for some time to come. As a result, short-term real interest rates in the US are set to remain negative for the foreseeable future.

However, no mention was made of further quantitative easing (QE3); the current program (QE2) ends this month. While low real interest rates support a higher gold price, we see the dominant causal driver of gold as global liquidity. We measure global liquidity as the Fed’s balance sheet plus global FX reserve holdings. Using this measure, the Fed’s balance sheet contributes around a third of global liquidity. The rest is made up of government borrowing.

While further QE by the Fed would no doubt accelerate gold’s ascent in the medium term, a refusal to expand the balance sheet further shouldn’t end gold’s push higher ,as we doubt that global government borrowing (in nominal terms) will decline soon. We therefore believe
that global liquidity will grind higher — and so will the gold price.

Gold has strong resistance at $1,550. A break higher could see it test $1,557. Support is at $1,536 and $1,529.

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