An Excerpt from CRB'S Futures Market Service.
Gold likely to see sustained support from dovish turns in ECB and Fed policy
April gold has rallied sharply by $233 per ounce from the low posted in late-December. That rally has been driven by some weakness in the dollar, new buying by investors in the New Year, the fact that the Chinese economy is so far showing a soft landing, the uncontained European debt crisis, and the recent dovish turns by both the Fed and the ECB.
The ECB since Mario Draghi took over in November has made a U-turn from the policy of former ECB President Trichet. Mr. Draghi cut the ECB’s refinancing rate by 25 bp at his first two meetings in November and December to the 1.00% level that prevailed after the financial crisis. The ECB in late December also held the first of its two unlimited 3-year bank loan operations, thus flooding the European financial system with relatively long-term liquidity. We support the ECB’s recent actions as a means to prevent an all-out systemic banking system and the action in retrospect has worked. However, the ECB’s actions are nevertheless bullish for gold.
Meanwhile, the Fed since QE2 ended in June 2011 was relatively well-behaved with its asset level pegged at $2.9 trillion. The Fed began its $400 billion Operation Twist program in Sep 2011, but that operation is not printing new money. However, the FOMC at its meeting last week went too far in our view by extending its outlook for exceptionally low rates until late-2014 from mid-2013. In addition, Mr. Bernanke virtually promised QE3 if there is the hint of any new trouble.
The Fed in our view should have stood pat last week and let the economy continue its self-healing process. Instead, the Fed’s decision on the late-2014 timing made the Fed look panicky and trapped in a bubble of crisis paranoia. The Fed’s announcement made it look even more likely that the Fed will fail to recognize when it is time to start draining liquidity and will end up causing an inflation and interest rate spike in the next 1-2 years, with bullish implications for gold.
Gold has already rallied sharply in the past month and traders may want to wait for a pull-back. However, as long as the European debt crisis remains uncontained and the Fed and the ECB are pursuing ever-easier monetary policies, we look for the gold rally to continue.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Like what you’re reading? Try CRB's Futures Market Service - $1 for 1 Month!
"Futures Market Service" is a daily publication that helps you gauge market direction, and how far and when the market may move. It helps you understand these factors through our fundamental commentary and our weekly commodity and financial calendars.We analyze factors such as Fed policy, inflation, interest rates, stock market earnings and valuation, the dollar, metal and petroleum fundamentals, crop reports and global crop conditions, and livestock and softs fundamentals. Sign up today
