Gold price may rebound as the Fed reconsiders the possibility of QE3

The gold price held near $1,700 per ounce Monday morning as financial markets digested a lower Chinese economic growth forecast.  The price of gold traded in a wide range between $1,695 and $1,720 in overnight trading after China reduced its growth target for 2012 to 7.5% from 8.0%.  The U.S. dollar stabilized near unchanged against a basket of foreign currencies, while equity markets turned modestly lower in morning trading.

Last week’s entire decline in the gold price occurred on Wednesday, when the yellow metal plummeted $92.00 following congressional testimony from Fed Chairman Ben Bernanke.  The tone of Bernanke’s remarks was less dovish than expected, and he indicated that the Fed does not intend to launch a third round of quantitative easing (QE3) in the near future.

Dennis Gartman – author of the widely-read Gartman Letter – commented that “When Bernanke didn’t mention the possibility of another round of monetization, that was enough to take the fizz out of everything.  Before today, gold was looking quite strong, but today it just gave up the ghost.” A key reason for Bernanke’s less dovish stance was the Federal Reserve’s improved outlook for the U.S. economy.  In his prepared testimony, the Fed Chairman stated that “With output growth in 2012 projected to remain close to its longer-run trend, participants did not anticipate further substantial declines in the unemployment rate over the course of this year.”

While the Fed is projecting continued improvement in the labor market, it is critical to note that its economic forecasts have historically been overly optimistic.  Two of its most noteworthy mistakes included missing the bursting of the housing bubble, and later the severity of the 2008 financial crisis. Looking ahead, the Federal Reserve’s outlook will be tested in short order as the February non-farm payrolls report will be published on Friday.  The monthly jobs data will be one of several economic data points and catalysts for the gold price that is released in the coming week.  Monday’s schedule includes the ISM Services Index and a report on Factor Orders.  The ADP Employment data will be announced on Wednesday, followed by weekly jobless claims on Thursday.

If the upcoming data reinforces Bernanke’s view that the economy is picking up steam, the gold price could face additional selling pressure.  Alternatively, if the reports indicate a more challenging economic environment, the gold price may rebound as the Fed reconsiders the possibility of QE3.

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