“QE3 Probability” Could Boost Gold, No Need for Gold Standard “Until Money Collapses Completely”
London Gold Market Report
SPOT MARKET gold prices traded close to $1610 an ounce for most of Tuesday morning in London, after breaking through the $1600 mark during the earlier Asian session.
Silver prices touched $28 an ounce for the first time in nearly two weeks, while stocks and commodities also gained after disappointing US manufacturing data led to renewed speculation that the Federal Reserve might launch a third round of quantitative easing, known as QE3.
US manufacturing activity fell last month, according to the June ISM purchasing managers index published Monday. The ISM PMI was 49.7 – down from 53.5 in May and below analysts’ consensus forecast, which was around 52. A PMI score of less than 50 indicates contraction.
“The dimmed economic outlook leads to expectations of more stimulus, which will weaken the Dollar and help metals,” says one trader in Shanghai, adding that “silver will be relatively weaker than gold due to its industrial nature.”
“Over the last few weeks US numbers have worsened a lot,” says Eugen Weinberg, head of commodity research at Commerzbank.
“This has brought about the probability of QE3 – which is probably the most important reason for the market to believe in gold.”
The Federal Reserve last month chose not to launch an additional round of QE, instead extending its bond maturity extension program Operation Twist, which aims to lower longer term interest rates by selling shorter=dated securities and buying longer-dated ones.
“We are unlikely to see a big add-on after Operation Twist was extended,” reckons Dominic Schnider at UBS Wealth Management.
“Unless things fell off the cliff. And remember, when things did fall off the cliff in 2008, gold fell as well.”
Sales of gold coins by the US Mint were down 40% in the first half of the year, compared to the same period last year, although June sales beat May’s for the first time in three years.
Over in Europe, goods prices received by producers fell 0.5% in May, according to official Eurozone producer price index data published Tuesday.
“Businessmen don’t like prices going down,” says Lord Robert Skidelsky, professor of political economy at Warwick University, speaking on BBC Radio 4 Monday on a program looking at whether a gold standard would make the financial system more stable.
“It means they produce at one price and then may have to sell at a lower price…they prefer prices to be going up [because] they reckon their profits as a markup of their costs.”
Skidelsky adds that “although [western economies have] been printing money, it hasn’t been too much money”.
The time to worry, says Skidelsky, is when prices “accelerate and the value of money collapses completely…then of course you go back to gold”.
Here in London, Bob Diamond has resigned as Barclays chief executive. Diamond has been under pressure since Barclays was fined a record £290 million last week, after the bank admitted some of its staff had sought to manipulate Libor, the London interbank offered rate used as a worldwide benchmark.
Marcus Agius, who resigned as Barclays chairman on Sunday, will now return to lead the hunt for Diamond’s successor.
Over in Asia, traders report that the rise in gold prices since the weekend has led to a fall in demand for physical bullion.
“Customers went in to pick up gold below $1560 last week, but now the market is quiet again,” one dealer in Singapore told newswire Reuters Tuesday.
Ben Traynor
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
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