August 31, 2011
The price of gold saw its largest monthly gain in nearly two years after Federal Reserve comments on possible measures to boost U.S. growth. The gold price has risen by nearly 50 percent since the Fed signaled in August last year it would inject more stimulus into the economy. Since then, it has also committed to leaving U.S. interest rates near zero for another two years.
Minutes from the Fed’s policy meeting on Aug. 9 released Tuesday showed the central bank discussed a range of unusual tools it could use to help the economy and more quantitative easing remains an option.
Fed members remain divided on the direction of policy. Chicago Fed President Charles Evans, a voter on this year’s policy-setting committee, said he favored the more aggressive tools at the bank’s disposal, while Minneapolis Fed president Narayana Kocherlakota, speaking separately, stopped well short of signaling support for further easing.
“There is a sense of ‘Are we moving towards something that looks like third round of (quantitative easing)?’ Our economists say it’s unlikely but I think it’s a question financial markets are going to continue to ask themselves, (as well as) if we are looking at a period of more serious downturn in economic activity. So for us, gold still continues to move higher,” said Deutsche Bank analyst Michael Lewis.
“The next data point for gold is some sort of clarity out of the U.S. Fed over the next few weeks on whether they will deliver another round of quantitative easing or not and just let their economy continue on a slow growth path rather than a supported high growth path,” said Tom Price, global commodity analyst at UBS. The Fed is scheduled to meet on Sept. 20 to discuss options to help spur the faltering U.S. economy.
“The combination of still-elevated equity market volatility and U.S. data still looks like it is pointing to potential downgrades to the growth outlook, particularly if confidence is turning lower, will still be quite favorable to gold,” added Lewis, whose bank has a price target of $2,000 an ounce for gold.
China’s bullion-accumulation program was in the spotlight after a People’s Bank of China (PBOC) adviser told the China Business News that Beijing should increase its holdings of gold and other commodities. “China should realize that gold is an important strategic reserve, and should increase its holdings over the long term, buying on price dips,” PBOC adviser Xia Bin said. “In the past we have not established this as an investment principle, but now we must.”
Data from the International Monetary Fund showed Russia raised its gold holdings again in July to remain the world’s eighth-largest official holder of bullion, while Colombia raised its reserves for the first time in over 13 years.
(Sources: “Gold Dips, but Supported by Fed Outlook,” CNBC, August 31, 2011; “PRECIOUS-Gold dips as stock markets climb,” Reuters, August 31, 2011; “Gold steady after retaking $1,800,” MarketWatch, August 31, 2011)