Potential for a third round of quantitative easing (QE3) has increased

The gold price stabilized near $1,690 per ounce Tuesday morning following its best day since late January.  The price of gold traded in a tight range between roughly $1,685 and $1,695 in overnight trading as financial markets digested yesterday’s broad-based rally in risk assets.

Speaking yesterday at the National Association for Business Economics Annual Conference, Bernanke addressed the ongoing challenges facing the U.S. employment market.  The Fed Chairman noted that “further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.”

Bernanke also contended that “cyclical rather than structural factors are likely the primary source of its (unemployment) substantial increase during the recession.”  However, he cautioned that even if structural factors are likely to keep the unemployment rate elevated for the foreseeable future, the Fed “should not conclude that nothing can be done” to support the economy.

Goldman Sachs’ chief U.S. economist, Jan Hatzius, wrote in a note to clients after the speech that “Chairman Bernanke’s read on the state of the labor market was consistent with an accommodative stance for monetary policy—though he did not directly call for additional easing.”

Nevertheless, judging by the reaction of the gold price and other U.S. dollar-denominated asset classes, investors appeared to believe that the potential for a third round of quantitative easing (QE3) has increased.

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