Gold Price Steady Ahead of Bernanke’s Speech

GOLD PRICE NEWS – The gold price advanced Friday morning, gaining $3.00 to trade at $1,778 per ounce ahead of a widely anticipated speech from Federal Reserve Chairman Ben Bernanke at a central bank symposium in Jackson Hole, Wyoming.  Bernanke will deliver his latest thoughts and outlook on monetary policy and the state of the U.S. economy.

Following last year’s symposium, in which Bernanke discussed the potential for a second round of quantitative easing, the gold price and most other dollar-denominated asset classes surged higher.  Given the rise in inflation over the past year, it appears unlikely the Fed Chairman will suggest a new round of asset purchases is in the offing.

On Thursday, the gold price rebounded from a sharp morning sell-off that saw it tumble as low as $1,704 per ounce.  However, the price of gold surged higher as the day wore on, bouncing back all the way back to $1,770.  A weaker than expected reading on weekly jobless claims helped propel the gold price higher, along with short covering and bargain hunting following the prior two days of substantial selling.

Silver climbed alongside the gold price, climbing 3.5% to $41.07 per ounce.  Gold’s sister precious metal hovered near unchanged Friday morning.  Precious metals equities moved marginally higher today after a strong day yesterday.  The Philadelphia Gold & Silver Index (XAU) rallied 1.7% to 210.93, led by Barrick Gold (ABX) and Goldcorp (GG), the index’s two largest components, which advanced 2.0% and 2.3%, respectively.  Newmont Mining (NEM), the only gold miner included in the S&P 500, rose 1.0% to $60.83 per share.

Heading into this year’s Jackson Hole speech, calls for a third round of quantitative easing (QE3) have increased in recent months as the economy has softened and financial markets have declined.  Although most economists are predicting that the Fed Chairman will not announce QE3 at Jackson Hole today, the potential for it over the course of the next year remains substantial.

Goldman Sachs analyst Sven Jari Stehn does not believe a new round of money printing would have nearly as much of an impact on easing financial conditions as the first two rounds of asset purchases did.  “This is because Fed asset purchases are likely to have larger effects during times of extreme market stress, and particularly when they are targeted at a specific market dislocation, like the mortgage-related purchases during QE1,” he wrote in a note to clients.

Stehn’s claim was based on the fact that although markets have experienced considerable weakness in recent months, conditions remain far more stable than in March 2009.  He went on to say that “As a result, one would expect that QE1 had a more significant effect on financial conditions than the subsequent program.”  To back up his contention, he provided data showing a diminishing marginal return of quantitative easing on the Goldman Financial Conditions Index, a measure of numerous economic and market indicators.

Lastly, the Goldman analyst noted that a further decline in interest rates from QE3 is unlikely to have “a significantly positive effect” on U.S. housing conditions, which is critical to generating a more sustainable economic recovery.  He based this on “the large amount of unoccupied inventory that currently hangs over the market” and households’ inability to extract equity from their homes to help fuel consumer spending.  In addition, QE3 would likely lead to higher food and energy prices, further curtailing economic growth.

Although Stehn did not discuss the specific implications of QE3 for the gold price, they would likely be quite positive.  The inherent currency debasement that stems from money printing is bullish for gold prices.  Notwithstanding whether QE3 is announced or not, the recent flurry of soft economic data presents a positive macroeconomic backdrop for gold prices.  Policymakers will likely engage in further Keynesian stimulus measures, an outcome which would be music to the ears of those bullish on the gold price.