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Global Liquidity Flood Could Send Gold To $2,000 This Year
After peaking above $1,900 an ounce last September, gold has truly been a disappointing investment. Bullion is down about 20% in the time as investors have pared their hopes for a new policy bazooka from Bernanke, while the U.S. dollar has strengthened and physical demand for gold has waned. It might just be the opportune time to buy gold, though, as the yellow metal trades near its 52-week low and global policy easing may be closer than people think.
According to Merrill Lynch’s head of global commodity research, Francisco Blanch, gold will hit $2,000 by the end of the year as the Fed unleashes more QE. Speaking at CNBC’s Squawk Box, Blanch noted that he expects Federal Reserve Chairman Ben Bernanke to engage in a $500 billion asset purchase program to prop up the ailing U.S. economy sometime around September, sending bullion skyrocketing.
Economists at Nomura suggest growth in China will pick up in the second half of the year on the back of gradually executed stimulus. The People’s Bank of China has delivered two rate cuts over the last two months, and consumer inflation has already dropped to a 29-month low (PPI has been negative, signaling the build-up of further deflationary forces). According to Nomura, having learned from past mistakes, China will inject public funds and ease gradually, managing to accelerate growth into the second half of the year. Stimulus and a stronger China should increase demand for gold.
In the U.S., markets were disappointed by the latest Fed minutes, which showed less support for policy easing than in previous meetings. The Dow tanked and yields on 10-year Treasuries slid dramatically; both asset classes recovered toward the end of the trading session. A weak jobs report last week, coupled with consistent below-expectations data releases have made a bear out of many in these markets, as volume tanks and stocks go nowhere.
Even in Europe, where the major downside risks reside, Mario Draghi and the ECB have cut their key interest rate to a record low 0.75% last week, there is speculation that stronger simulative measures are on their way, as JPMorgan’s head economist for the private bank, Anthony Chan, told me a few weeks ago. European authorities have already hinted at resuming sovereign bond buying programs to push down Spanish and Italian borrowing costs, and an associate director at a credit rating agency suggested they will have to launch a large
asset-buying program in some shape or form.
Thus, it seems that a wave a monetary easing and stimulus is relatively near, given widespread weakness in the global economy. One of the most prominent Fed watchers, the Wall Street Journal’s Jon Hilsenrath, said FOMC members “sent new signals they are seriously considering more actions to bolster the economic recovery. Hilsenrath made clear that “high on the list of options [the Fed could engage in to spur growth] is a new round of ‘quantitative easing.’”
It does appear that betting on gold right now is essentially a proxy on how close the FOMC is to their QE-threshold. While market reaction to the minutes indicated investors believe Ben is shying away from that option, the conditions are quickly approaching. Beyond the risks posed by the global economy (i.e. China) and Europe slowing down, inflation, as measured by the Fed’ favored PCE index, has slowed, as BEA data show.
Analysts at UBS, suggested another leg down in commodity prices would come before sufficient stress pushes central banks into action. This, in turn, would provide an early opportunity to buy into gold and gold equities, they explained. Major gold miners like Barrick Gold, GoldCorp, and Newmont Mines have substantially underperformed bullion this year, giving them attractive valuations, despite the increased risk.
Gold hasn’t treated investors well recently, delivering subpar returns and failing to respond as a hedge amid uncertainty and risk. It’s always hard to call a bottom, but there are signs that suggest central banks are being pushed to act. If they do, and act in force, then gold could be setting up for a nice rally.