QE3 talk pushes gold to nominal record

(July 14, 2011 - by Jack Farchy in London)

Gold surged to a new record on Wednesday, propelled by the possibility of a third round of quantitative easing in the US.

The yellow metal, already rallying hard on the back of fiscal concerns in the eurozone, jumped to within reach of $1,600 a troy ounce after Ben Bernanke, Federal Reserve chairman, said the central bank could take further steps to prop up the US economy if needed.

In testimony to Congress, Mr. Bernanke said the Federal Reserve stood ready to provide “additional policy support” if the economy remained weak.

“When he said further stimulus may be required, the gold market bolted,” said James Steel, precious metals strategist at HSBC in New York. “There was a significant pick-up in activity on the buy side and it spread across the entire precious metals spectrum.”

Gold rose as much as 1.4 per cent on Wednesday to touch a new peak of $1,587.46 a troy ounce.

That surpassed the previous peak of $1,575, touched on May 2, the latest record to fall in gold’s decade-long bull run, in which the value of the precious metal has risen six fold since 2001.

Gold also hit fresh records when denominated in euros, sterling and rand. Adjusted for inflation, however, it remained below its 1980 peak, which translates to about $2,400 in today’s money.

Silver also jumped on Wednesday by as much as 6.1 per cent to a peak of $38.30 a troy ounce.

Further injections of liquidity by the Federal Reserve would boost global liquidity, driving money into gold and other hard assets, analysts said.

Walter de Wet, head of commodities research at Standard Bank, estimated that for every $500bn of additional liquidity provided by the Federal Reserve, gold prices would rise by $80-$100 an ounce.

The yellow metal rallied about $270 an ounce between Mr. Bernanke’s first mention of a second round of quantitative easing – or “QE2” – in August last year and the end of the programmer in June.

“If you’re a believer in more QE, then it makes sense to be long gold,” said Mr. de Wet.

“We are not firm believers yet that we are going to see QE3 but certainly events over the past two or three weeks have raised the probability in the mind of the markets that there might be a QE3.”

Minutes of the most recent meeting of the Federal Reserve’s rate setting committee, released on Tuesday night, revealed that some members were in favor of additional stimulus if the economy remained weak.

Gold has also been supported by the debt crisis in the Eurozone, with some traders drawing parallels with last summer, when fear of a default drove investors to seek safety in bullion.