Gold price benefiting from QE speculation

Signs of a decelerating global economy will likely prompt central banks to take drastic new measures in terms of fiscal expansion. This is especially true for China, where GDP growth continues to slow. Market participants also suspect that the US Federal Reserve may be edging closer to announcing more quantitative easing, in an effort to help the economic recovery in America. This speculation has led to gains in the gold price, which climbed as high as $1,667 per troy ounce in trading yesterday – although it lost some of these gains later in the day. Nevertheless, this marked a new five-week price high which could open the way for more gains.

Besides the People’s Bank of China and the US Federal Reserve, the Bank of England (BoE) is also expected to announce new quantitative easing measures soon. As the Centre for Economics and Business Research (CEBR) announced at the beginning of this week, the BoE is expected to extend its bond purchasing programme to £400 billion. This announcement caught the attention of market observers, as during the second half of 2011 the BoE already decided to extend its gilts purchasing programme from £200bn to £275bn. Economists expect the UK economy to be officially back in recession by the spring.

The People’s Bank of China is also expected to take new measures to stimulate the country’s economy. Although in Q4 China’s annualised economic growth stood at 8.9% – a healthy figures in comparison with the anemic growth rates seen in developed nations – this is below the 10%+ rates seen in recent years. With Chinese inflation falling slightly in recent months, economists and analysts believe that the People’s Bank of China has more leeway to stimulate the economy with new liquidity. Other commodities such as base and non-ferrous metals (copper, zinc, tin, lead, aluminium, etc) also registered significant gains in trading yesterday. China’s economic growth is especially important for the commodity markets, as the country accounts for around 40% of global commodity demand.

Anyone who compares recent and previous statements by the members of the Fed’s Open Market Committee (FOMC) might draw the conclusion that during its next policy meeting – set for January 24 and 25 – the Fed will announce new stimulus measures. Many market participants are asking themselves how, in the face of the escalating European sovereign debt crisis, the risk of the Chinese real estate bubble bursting, and the still subdued US economy, global stock markets are still registering gains. But these gains are based on the same expectations that in recent days have also propelled precious metals prices and commodity prices higher: the expectation that soon central banks will flood the financial markets with more new money.

GoldMoney: Buy gold & silver online

Author: Roman Baudzus

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