Following a Bank of America Merrill analyst’s projection about Gold hitting $2,400 in the next two years, Gartman Letter editor Dennis Gartman expressed his doubts about the figure to CNBC, but his opinion on the yellow metal to ‘Fast Money’ was clear.
“I think clearly the trend in gold is from the lower left to the upper right… Clearly, it’s moving higher. Clearly, the expansion of the monetary aggregates is going to drive gold prices upward. It is a bull market. Don’t fade it,” said Gartman.
In a note to the clients on Tuesday, Bank of America Merrill Lynch global trade analyst Francisco Blanch said, “The new target reflects our view that the Fed will maintain mortgage purchases until the end of 2014 and will move to buy Treasuries following the end of Operation Twist this coming December.” Operation Twist is a nickname for a program conducted by the ‘Fed’ (the U.S. Federal Reserve) that was initiated in late 2011-early 2012 for revitalizing the economy. It is an initiative to buy longer term Treasuries and sell shorter dated issues in order to scale down long-term interest rates. The Operation derives its name from the fact that it ‘twists’ a ‘yield curve’, which is a simple representation of the interest rates of a mature bond and when the bond pays. As the Fed buys longer term bonds, it helps drive prices up and yields down, which contributes to the twisting of the curve.
Quantitative easing is an unorthodox method of introducing fresh money into the finances of a country when existing monetary policy has been rendered ineffective. It is carried out by a central bank or agency (in this case the Fed) by buying financial assets from commercial banks with newly procured money in order to reinforce the quantity of money circulating in an economy. Federal Reserve Chairman Ben Bernanke has ordered the third round of quantitative easing since the financial crisis of 2008, called the QE3, in which there are plans to expand long term securities with open ended purchasing of $40 billion worth of debt mortgage a month. It is a matter of serious concern for Bernanke as the unemployment rate has hung above the 8 percent since three years, and he plans to remedy it with unconventional tools.
In its statement on how long the QE3 would last, the Federal Reserve has used open ended language in saying that it would continue purchases and look for other methods till the labor market shows significant improvement.
Blanch further added to his statement, saying: “Given the new open-ended nature of QE3, the upward pressure on gold prices should continue until employment is strong enough to require a change in policy. In our view, this is unlikely to happen until the end of 2014.”
In his report entitled “Gold under QE Infiniti,” Blanch says, “The combination of open-ended MBS purchases and the possibility of additional Treasury bond purchases starting in December could further lift gold prices by adding over $2 trillion to the Fed’s balance sheet over the next two years.”
Looks like it is good for gold.