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Friday, March 16, 2012

Gold Price Consolidates, QE3 Coming by June?

 The Goldman economist went on to raise the issue that “The economic indicators are improving, financial conditions remain accommodative, and inflation is at or above the Fed’s target. So why should they ease further?”  He responded by noting that “The improvement might not last; Even if the improvement does last, faster growth would be desirable to push down the unemployment rate more quickly; and not easing might be equivalent to tightening” due to his contention that the “bond market currently discounts some probability of QE3.”

Hatzius subsequently addressed another point of contention by asking “Wouldn’t QE3 be inconsistent with the Fed’s observed reaction function over the past few years?”  While he acknowledged that “at some level” it would be inconsistent, the Goldman Sachs economist noted that the FOMC currently contains even more dovish members than in past years.  Additionally, Hatzius noted that “At the January 25 FOMC press conference, Chairman Bernanke seemed to indicate a materially lower threshold for additional easing when he said that he saw a ‘very strong case’ for more easing if the economy evolved in line with the SEP projections–which projected neither a large inflation undershoot nor a growth slowdown.”

In sum, if Hatzius’ forecast proves correct, the gold price is likely to receive a considerable tailwind in the form of further money printing by the Fed.  Furthermore, judging by the prior two rounds of QE, the recent weakness in the price of gold is likely to be viewed as another correction before the yellow metal’s bull market resumes.

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