Analysis: Gold favors slow burn over surge post-Fed easing

Fri Sep 28, 2012 12:32pm EDT
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By Jan Harvey

LONDON (Reuters) - The Federal Reserve's multi-billion dollar, open-ended monetary easing pledge is being hailed as the catalyst for another crack at record highs in gold, but its failure to spark a high-octane rally suggests other factors are in play for the bullion market.

The Fed's plan to buy $40 billion a month in mortgage-backed securities has been launched in a different gold market to the one in 2008, when an initial round of easing sparked a surge in volatility and a rush to consecutive record gold price highs.

Sky-high prices after the run-up of recent years are curbing demand for physical metal, while a sharp price correction after gold hit a record $1,920.30 an ounce in September 2011 has knocked confidence in its ability to keep extending gains.

Although gold put in a 2 percent price jump on the day this month when the latest Fed measures were announced - adding to an 8 percent climb over the preceding month in anticipation of the move - that rise fell short of this year's highs, petering out below $1,790 an ounce.

But that is not to suggest that the Fed's move will not ultimately lead to another record high in gold.

"With this open-ended commitment from the Fed to do whatever is necessary (for the U.S. economy), we will see new highs, but it may take longer than the market through to get there," Credit Agricole analyst Robin Bhar said.

"The gold price has really motored when everything has been aligned, and generally that has been when physical buying has been strong. That's been notably absent in the last quarter. It's all very well making physical purchases when the price is attractive, less so when the price is close to record highs."

"A lot will depend on how the dollar performs. The argument is that printing money debases the currency, and gold is the ultimate hard currency," he said. "Now, that argument has to be scrutinized. It has to stand up to the evidence."   Continued...