(QE3) – a potential key catalyst for the gold price in 2012

The gold price oscillated around the $1,600 per ounce level Wednesday, digesting yesterday’s 2.5% gain. News this morning that bank deposits at the European Central Bank’s overnight facility reached an all-time high this week sparked worries that funds are being hoarded – not lent out. Banks parked €453 billion ($591 billion) in the ECB’s overnight deposit facility. Stock prices in Europe fell 0.5% as measured by the Stoxx Europe 600 Index and crude oil slipped 0.6% to $102.39 per barrel.

The gold price and broader markets maintained their gains following the release of the latest Fed minutes late yesterday. The summary of the December Federal Open Market Committee (FOMC) meeting revealed that despite the recent improvement in economic data, the U.S. central bank remains quite concerned about the U.S. economy heading into 2012. The Ben Bernanke-led Fed cited the challenging labor and housing markets, along with the euro crisis, as key factors behind its cautious outlook.

With regard to a third round of quantitative easing (QE3) – a potential key catalyst for the gold price in 2012 – the Fed minutes noted that “A number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation, but they believed that any additional actions would be more effective if accompanied by enhanced communication about the Committee’s longer-run economic goals and policy framework.”

Although the Fed once again stopped short of committing to QE3, it is clear that the central bank intends to maintain its dovish stance for the foreseeable future. Furthermore, three of the most hawkish FOMC members –Fisher, Kocherlakota, and Plosser – are no longer voting members due to a rule where various Fed Presidents are required to rotate their positions on an annual basis. If economic conditions worsen, the Fed would therefore have a far easier time reigniting the printing presses – a development that would have bullish implications for the price of gold.

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