No $2,000 Gold Without QE3

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"According to Merrill Lynch, the gold bugs may be in for some disappointment."

Forbes, Steve Schaefer

The gold bugs may be in for some disappointment if the U.S. economy's soft patch is temporary and Federal Reserve Chairman Ben Bernanke doesn't have to conjure up another few hundred billion dollars worth of bond purchases.

The commodities research team at Bank of America Merrill Lynch has been on the gold bandwagon since setting a $1,500 price target in 2008, but commodity strategist Francisco Blanch said Tuesday that the best gains are in the rearview mirror and a cyclical peak is likely in the cards as the U.S. interest rate cycle starts to change.

Speaking at BofA-Merrill's mid-year outlook briefing in New York, Blanch said while a number of factors have contributed to gold's astronomical advance over the past three years, one crucial element is likely to turn against the yellow metal. "Gold will struggle to push a lot higher as the real rate cycle changes," Blanch said. "To get to $2,000 [an ounce] you would need QE3."

That is because gold prices have been largely correlated with real interest rates dating back to when the metal was trading for less than $600 an ounce five years ago.

Jeffrey Rosenberg, BofA Merrill's head of global credit strategy, said the firm continues to expect higher rates across the yield curve by the end of 2011. While the move won't be drastic—the two-year is seen at 1% from Tuesday's 0.47%, with a 3.60% 10-year from the present 2.99% level—it will be plenty to limit the advance of gold in Blanch's view, which calls for a year-end price of $1,650 an ounce.

Demand will continue from central banks, a trend Forbes' Bob Lenzner has been on top of since last year, but not enough to offset the slowdown that will be produced by higher real interest rates, according to Blanch.

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