Gold Prices: Begging for QE3

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"In the last round of easy-money moves back in January, gold rallied as high as 15%. Since then, gold has dropped numerous times from a lack of additional news of more easing."

The Fed's Operation Twist announcement Wednesday slammed gold prices, and the yellow metal fell 2.5% Thursday.

Gold for August delivery ended last week down 3.8% to about $1,570 an ounce, well below its 2011 high of $1,920.30.

Before the two-day FOMC meeting, gold was up 4% year-to-date. Gold rose at the beginning of the week on hopes that the Fed would announce accommodative moves.

In the last round of easy-money moves back in January, gold rallied as high as 15% as investors flocked to the asset for protection. Since then, gold has dropped numerous times from a lack of additional news of more easing.

Gold was once again disappointed last week when the Fed said it would keep twisting, and the lack of a more aggressive maneuver failed to give a needed gold rally.

"To get gold really moving, you need a definite QE3," Sterling Smith, commodity analyst with Citi Institutional Client Group, told Kitco News. "Operation Twist is not nearly the food for a gold bull that outright QE is."

Gold Prices and Operation Twist

On Wednesday morning, the Fed announced the extension of its long-term government bond holdings by $267 billion to decrease borrowing costs while selling an equal figure of short-term securities to keep its $2.9 trillion balance sheet.

While scheduled to end this month, the Fed extended the Operation Twist program until the end of the year.

Operation Twist is derived from a Federal Reserve program that "twists" the yield curve or sells short-term securities from its holdings and buys longer-term ones in an effort to drive down longer-term yields.

Market watchers had been mixed about this happening.

Barclay's Capital saw Operation Twist as "the most likely outcome," saying it would provide additional time for the Fed to sift through and mull soft data that is "payback" from the additional warm winter hiring or a potentially lengthier prolonged slowdown, reported Kitco.

But because Operation Twist was considered the least the Fed could do, markets had priced it in already.

Jeffrey Wright, managing director and research analyst with Global Hunter Securities, said to Kitco he expected limited gains for gold on the heels of the "Twist," possibly to the $1,650 range, as the market has already been adding in the possibility for Fed action.

Gold Prices and QE3

While the Fed said Operation Twist will be in place through year's end, gold bulls are still hoping for another round of quantitative easing, or QE3.

QE3 involves the Fed buying more Treasury securities as a means to drive down long-term yields.

For gold players, this is good.

"Quantitative easing, or an expansion of a central bank's balance sheet, is more favorable for gold prices. . .[as it] tends to have a strong negative impact on the U.S. dollar and is also more likely to raise inflationary expectations," BNP Paribas precious metals strategist Anne-Laure Tremblay wrote in a client research note.

But gold fans, don't lament Operation Twist for too long—Fed intervention is far from over, and the anticipation of more later this summer could start a gold run.

"Gold has shown itself to be very sensitive to shifts in expectations of U.S. monetary policy," James Steel, chief commodity analyst at HSBC said to Reuters.

Tremblay wrote in her research note that long-term she sees gold prices improving this year and next from more central bank policy actions.

Money Morning Staff

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