Gold Price Drops, QE3 Debate Intensifies

GOLD PRICE NEWS – The gold price dropped $9.74 to $1,479.52 Tuesday amid further selling pressure in precious metals.  Silver continued to slide alongside the gold price, falling $0.26, or 0.8%, to $33.37 per ounce.  A rebound in the U.S. dollar against most of its foreign counterparts helped pressure the price of gold and silver, which are now lower this month by 5.4% and 30.4%, respectively.

On Monday, the gold price dipped $5.95 to $1,489.26 as the price of gold struggled to hold above $1,500 per ounce. The SPDR Gold Trust (GLD), the most liquid gold price proxy in the equity markets, settled lower by $0.26 at $145.37 per share.  With the drop in the gold price, the yellow metal is now 5.5% below its $1,577.40 all-time record high, reached on May 2.

A key catalyst for the recent weakness in the gold price has been the expiration of the Fed’s second round of quantitative easing, QE2, which is set to occur on June 30.  With the debate intensifying of late amongst investors and economists over the likelihood of yet another round of quantitative easing, uncertainty surrounding the outlook for the gold price has risen in kind.

Jeff Currie, commodity analyst at Goldman Sachs, made a bearish call on the gold price at an industry conference. “Gold should directly reflect what has happened with QE,” Currie noted, “and we should see a substantial pullback.”  While he did not provide a longer-term forecast on the price of gold, his colleague at Goldman, chief U.S. economist Jan Hatzius, recently remained steadfast that the Fed will not engage in QE3 in 2011.

The cautious near-term comments from Goldman Sachs are consistent with those of John Burbank, founder and chief investment officer of $4.6 billion hedge fund Passport Capital.  Last week, Burbank predicted that the gold price will experience a short-term correction that could last through the summer.

However, Burbank conversely reiterated his long-term bullish outlook on the gold price. “The biggest reason to stay in gold is because central banks around the world can see the writing on the wall long term,” Burbank asserted, “which is that the dollar will be devalued one way or another and that Congress has no appetite for hard decisions which would be deflationary in nature.

Russell Russell, founder of Dow Theory Letters, the world’s longest-running daily investment letter, also addressed the likelihood of QE3 and the potential impact on the gold price. “The obvious next question is, what happens after June 30 when the Fed ends QE2? Will the stock market and the economy slump when the Fed halts its printing operation?”

“My guess is that the Fed will gear its operations to the market; if the market sinks the Fed will continue printing (probably printing under another name, and it won’t be quantitative easing),” Russell contended. “But after June 30 if the markets are holding together the Fed will take a rest, and Bernanke will announce to the world that ‘The Fed has saved the US and the world again.’”

While Russell – one of the foremost gold price bulls over the past decade – appeared uncertain over the possibility of QE3 in 2011, he appeared much more confident that the Fed will continue to provide significant levels of monetary stimulus leading up to the 2012 Presidential election.  “For this reason, I expect an all-out effort by the government to tell us that ‘the times are good and getting better.’ Political pressure will bear down on the Fed to do all it can to jazz up the economy.”  Based on the historical relationship between the gold price and quantitative easing, the price of gold would likely remain well supported in such a scenario.

(Source: http://www.goldalert.com/gold-price-drops-qe3-debate-intensifies/)