Investors "Enthusiastic for Gold and Silver" in Fed QE Expectations

By: Ben_Traynor

U.S. DOLLAR gold prices traded around $1730 an ounce during Tuesday morning's London session, broadly in line with where they started the week, while European stock markets ticked lower and longer-dated US Treasuries dipped.

Silver prices traded between $33.60 and $33.70 per ounce for most of this morning, near to last week's close, with other commodities also flat on the day.

Traders and investors continue to look ahead to this week's Federal Open Market Committee meeting, which begins tomorrow and concludes Thursday.

"Expectations that the Federal Reserve will start fresh quantitative easing [QE] measures at this week's FOMC meeting [have] played a large role in keeping gold prices in close proximity to their recent highs," says a note from exchange operator CME Group.

At this morning's London gold fix, the gold price in Euros was published as €1352.766 per ounce – the seventh-highest Euro gold fix price on record.

"Investors have become very enthusiastic about gold, as well as silver judging by ETF holdings and Comex positions," says CIFCO Futures analyst Li Ning in Shanghai.

Gold ETF holdings hits an all-time high at 72.4 million ounces Monday, according to data from Reuters, while the speculative net long position of gold futures and options traders on New York's Comex – measured as the difference between bullish and bearish contracts – hit its highest level since February last week.

"With a good portion of gold's recent strength accounted for by the sharp increase in spec[ulative] positioning, this certainly raises concerns on the longevity of the [recent] move," says UBS precious metals strategist Edel Tully.

"But the fact that the [ETF] camp – a relatively less-fickle group of buyers – has also been giving gold its vote of confidence offsets some of those worries."

Thursday's Fed announcement "will lie on the more aggressive end of the spectrum" reckons Steve Barrow, head of G10 research at Standard Bank.

"But, whatever the Fed does, it's still hard to challenge the view that the Fed—and other major central banks—are pushing on a piece of string when it comes to their monetary policy...[although] if more liquidity can lift economic sentiment, through higher stock prices and lower mortgage rates, extra QE might just be worth it."

"Gold prices are highly sensitive to the evolution of the monetary base (M0) which expands during quantitative easing," says a note from Societe Generale.

"During QE1 and QE2, gold prices increased 36% and 21% respectively."

Over in China meantime, the world's second-biggest gold buying nation last year, new loans in August were 703.9 billion Yuan ($112 billion) – up from 540 billion Yuan a month earlier and above many analysts' forecasts – according to data published Tuesday by the People's Bank of China.

"The data suggests that China is managing to boost the funding necessary to implement stimulus measures," says Dariusz Kowalczyk, Hong Kong-based senior economist and strategist at Credit Agricole.

"This bodes well for a clearer recovery of growth momentum [towards the end of the year]."

Last week, Beijing announced 1 trillion Yuan of infrastructure projects, although some have questioned how much of this represent new stimulus, since the projects include some that were already approved months ago.

Tuesday's PBoC data also include figures for Total Social Financing, the central bank's measure of how much credit is reaching the economy, and show a jump to 1.24 trillion Yuan, a 16% year-on-year rise.

"The increases in TSF and bank loans reinforce our belief that the government's policy stance has become more proactive," says Zhang Zhiwei, chief China economist at Nomura in Hong Kong.

Here in Europe, Germany's Constitutional Court has said it will not delay tomorrows ruling on whether the creation of a permanent Eurozone bailout fund and the imposition of a fiscal pact are at odds with German law, following a challenge from a German politician.

Peter Gauweiler, a backbench member of German Chancellor Angela Merkel's CSU party, lodged a complaint with Karlsruhe court following last week's announcement by the European Central Bank that it will make unlimited government bond purchases on the open market. Gauweiler argued that the creation of the European Stability Mechanism and the European fiscal pact will mean Germany no longer controls its own finances, in violation of the country's constitution.

Elsewhere in Europe, Greek prime minister Antonis Samaras is due to meet ECB chief Mario Draghi in Frankfurt, after Greece's coalition government failed to reach agreement on spending cuts. Samaras is asking creditors to give Greece an extra two years to implement austerity measures.

"There cannot be any new negotiations [with Greece]," German finance minister Wolfgang Schaeuble told the Bundestag this morning, adding that failure to implement a program agreed only months ago would "destroy" market confidence and increase contagion risks for the rest of the Eurozone.

By Ben Traynor
BullionVault.com

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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 2012

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