2012-09-04

Bernanke “Laying the Groundwork” for More Easing, Says El-Erian

Gold prices rebounded from an initial sell-off despite the fact that Federal Reserve Chairman Ben Bernanke failed to signal that a third round of quantitative easing (QE3) is forthcoming at his speech in Jackson Hole, Wyoming.  The spot gold price slid from near $1,665 to as low as $1,648.39 per ounce following the release of Bernanke’s prepared remarks, but soon after surged toward $1,680 as the U.S. dollar remained lower by 0.7% against a composite of foreign currencies.

Immediately after the Federal Reserve published Bernanke’s Jackson Hole speech on its website, financial markets moved into risk-off mode based in large part on the absence of any QE3 mention.  Gold prices declined alongside equities and cyclical commodities, while the U.S. dollar pared its losses.

With his speech this morning in Jackson Hole, Wyoming, Ben Bernanke has prepared the markets for additional quantitative easing – according to PIMCO CEO Mohamed El-Erian.
In an interview with CNBC following Bernanke’s comments, El-Erian contended that “First, Bernanke provided a very robust defense of what he’s done so far. Secondly, he told usp Problems were cyclical, not structural. And finally, he told us that costs are containable, they’re manageable. So, in my opinion, he is laying the ground for more activism from the Fed.”
When asked where he would invest based on his outlook, El-Erian mentioned gold as one of several asset classes that would help protect against the currency debasement inherent in the Fed’s easy monetary policies.

Several other market observers offered a similar take on the Fed Chairman’s remarks, including Goldman Sachs chief U.S. economist, Jan Hatzius.

In a report to clients, Hatzius wrote that “Fed Chairman Bernanke’s Jackson Hole speech makes the case for unconventional monetary easing–in particular, balance sheet and communication policies–as an effective tool, even if the ‘hurdle is higher’ for the use of such policies. In a dovish conclusion, he notes the poor state of the labor market as a ‘grave concern’.”

While the markets were already aware that the U.S. central bank stands ready to provide additional monetary easing if necessary, Bernanke’s comments this morning further hammered home this notion.  Moreover, judging by the rebound in the price of gold and gold stocks today, investors appear to believe that QE3 may be right around the corner.

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