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Gold Drops Back through $1800 as Bank of England Primes Public for QE2

Commodities / Gold and Silver 2011 Sep 21, 2011 - 08:18 AM GMT

By: Ben_Traynor


Best Financial Markets Analysis ArticleTHE DOLLAR gold price fell to $1789 an ounce Wednesday lunchtime in London – still a 1% gain on yesterday's low – while European stocks also fell as investors and policymakers weigh up their response to a sluggish growth outlook.

"The risk remains for another drop towards last week's low of $1763," say technical analysts at bullion bank Scotia Mocatta.

In recent weeks, every time the gold price has approached $1760 "the size of physical demand was large enough to take gold higher," adds Afshin Nabavi, head of trading at Swiss precious metals group MKS.

Commodity markets were flat Wednesday morning, while US Treasury bonds rose ahead of today's Federal Open Market Committee announcement in Washington.

The silver price dropped back below $40 per ounce – down nearly 2% for the week so far.
On the currency markets, the Pound Sterling fell sharply following the publication of the latest Bank of England Monetary Policy Committee minutes.

The MPC voted unanimously to leave its interest rate at 0.5% earlier this month, the minutes reveal.
Every member but one voted against increasing the size of the Bank's £200 billion asset purchase program – known as quantitative easing.

However, "a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase programme at a subsequent meeting," the minutes note, adding that there have been signs of "a synchronised slowing in global growth".

"The MPC has collectively started to prime the public and its policy cannons for the launch of QE2," said a note from economists at Nomura this morning.

The International Monetary Fund meantime cut its global growth forecast on Tuesday to 4% for 2011 – down from its 4.5% prediction made earlier in the year.

The IMF predicts 2011 growth in the Eurozone will be 1.6% – with US growth forecast at 1.5% and UK growth at 1.1%.

"Worries about sovereigns have translated into worries about the banks holding these sovereign bonds," said IMF director of research Olivier Blanchard.

"These worries have led to a partial freeze of financial relations with banks keeping high levels of liquidity and tightening lending."

Lloyds of London – the world's leading insurance market – confirmed Wednesday that it has withdrawn deposits from several European banks, citing sovereign debt fears.

"If you're worried the government itself might be at risk, then you're certainly worried the banks could be taken down with them," Luke Savage, finance director at Lloyds, told news agency Bloomberg.

Over in Athens, Greece will "have to take supplementary measures" to cut its budget deficit, finance minister Evangelos Venizelos told the Greek parliament on Wednesday, following talks with the IMF, European Central Bank and European Union, the three lenders overseeing the country's bailout.

The Greek government expects to run out of money in October unless it receives an €8 billion bailout installment.

The US Federal Reserve meantime is due to announce its latest monetary policy decision later today.

"Unless the Fed announces significant quantitative easing... our stance on gold remains neutral," says Marc Ground, commodities strategist at Standard Bank – adding that were the Fed to announce QE it would "surprise the market" and be "extremely positive" for the gold price.

Press reports suggest the Fed is widely expected to announce measures designed to lower the interest rates on longer-dated US Treasury bonds – dubbed 'Operation Twist' after a similar policy of the early 1960s.

In Montreal meantime, the average forecast from delegates at the annual London Bullion Market Association conference – which ended Tuesday – was for an 11% rise in the gold price over the next 12 months.

This is the same percentage gain forecast by LBMA conference delegates at both the 2010 and 2009 conference. On each occasion the gold price outperformed the average forecast – with outcomes of 22% and 39% respectively.

By Ben Traynor

Gold price chart, no delay   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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