INVESTMENT IN GOLD - PART 2

 

I refer to the latest sharing contributed by my friend Chan Cheh Shin which was posted on Jan. 14, 2011. Immediately after digesting and posting his article in this blog site, I remembered vividly that I had read an earlier write-up about the underlying factors for fluctuations in gold price. So, I searched through my rudimentary personal library, and without much time managed to locate it. The related article was published on Jan. 1, 2012 by a foreign print media.

There is one point expressed by the writer, which is akin to what Chan has postulated, i.e. the value of USD has an inverse effect on gold price. When USD is stronger, gold price would likely drop, and when USD weakens, gold price will be pushed up.

Apart from the inverse relationship between USD and gold, the supply and demand factor also comes into play in driving gold price. Of late, a surge in demand for gold by Asian markets was seen, especially China where gold acquisitions went up 50% in the fourth quarter of 2011. January 2012 witnessed a climb in gold imports to China, apparently linked to the Chinese New Year festival period.

The big question that is permeating amongst analysts is whether another round of quantitative easing (Quantitative Easing 3 or QE3 in short) would likely be rolled out by the US government this year. QE involves the printing of more paper money of a specific country’s sovereign currency to flush in more liquidity for stimulating domestic economy. The side effects of another round of QE in the US, if it does take place this year, will invariably cause depreciation of the USD, which will then propel a scramble for gold acquisition, thus pushing up gold prices upon increased demand.

The QE3 subject – on or off the shelf for 2012 – has become a guessing game of pundits. FoxBusiness on Dec. 14 reported that in an opinion poll involving a group of economists, 27 said they did not anticipate QE3 in 2012 while 26 visualised the other side of the coin.

Those who predict it is on the cards say the continuing Eurozone crisis is threatening to cause a further dampening impact on the US economy, hence triggering the need for stimulating measures. Analysts in one US-based investment bank even predicted gold price to soar to US$2,200 per ounce level as the by-product of QE3. Some said gold would be the preferred safe haven as they foresaw the US government (and probably the UK) being ready to opt for QE. They expressed expectations of a slow-down in the US economy in the 1^st quarter and the moderation of inflation being the compelling reasons for warranting another round of QE, probably in the 2^nd quarter.

Those who opine QE3 is unlikely to happen this year substantiate their basis that US has manifested signs of recovery in terms of GDP growth and unemployment rate improvement. The 4^th quarter GDP growth rate recorded at annualized 2.9% - the fastest of any quarter in 2011. This was better than 3^rd quarter which grew at 2%. At the same time, unemployment rate seems to be improving gradually – its rate dropped to 8.5% in December 2011 (8.6% in November), the lowest since February 2009. There were reports of relatively stronger consumer spending as well. If the two previous QEs could not make a significant difference in revving up the US economy to more successful levels, how would a third round turn out to be effective.........would it be a waste of efforts and resources?

Chan, who is in the second group (QE3 unlikely to take place in 2012), contends that one should decipher the gist of announcements or news releases made by the US Federal Reserve in order to get a better feel on the likelihood or otherwise of QE3. In this respect, I searched the internet and managed to zoom into a Nov. 2 2011 press release said to be issued by the Board of Governors of the Federal Reserve System. Allow me to re-produce some excerpts from this script:

·        * The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.

·        * The Committee also anticipates that inflation will settle over coming quarters, at levels or below those consistent with the Committee’s dual mandate……….

·        * However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

How do you read “in between the lines” of the press release? Are there innuendos that US Fed would probably go for QE3…….or not?

I am inclined to concur with Chan’s views that QE3 may not roll out in 2012. What about you? Care to share your views? 

Happy Gong Xi Fa Cai and Exciting 2012 to all.