QE3 may be right around the corner

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.

One of the most noteworthy hawkish comments from the Fed Chairman – who is normally considered very dovish – was when he stated that “Substantial further expansions of the balance sheet could reduce public confidence in the Fed’s ability to exit smoothly from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability.”
However, Bernanke concluded his speech by reminding the world that “As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years… Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

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.