Saturday, October 16, 2010

Gold's Uptrend Unaffected by Surprising Fall after Bernanke's Comments

World financial markets were influenced by 2 important themes last week. These themes are expected to affect investment appetite and asset price movements in the medium term. The first is Fed's return to quantitative easing. As indicated in the September FOMC statement, most Fed members inclined to implementing additional easing measures to boost the economy. Apart from buying long term Treasury securities, members also talked about strategies to anchor inflation expectations.

These views were echoed by Fed Chairman Ben Bernanke during his speech at a Boston Fed conference on Friday. Bernanke said the Fed may expand asset purchases or change the language in its statement. He said that 'there would appear, all else being equal, to be a case for further action'.

Speculations for further QE have sent the dollar to a 15-year low against the yen and the USD index to the lowest level since December 11. Weakness in USD has caused abundant capitals flowing into emerging countries and pushed currencies in these countries higher. This has triggered some sorts of 'intervention' in emerging markets. For instance, Brazil and South Korea are stepping up attempts to control their currencies. This round of currency tensions have been driven by global economic imbalances.

While advanced economies have been trying to depreciate their currencies and urge emerging countries (such as China) to speed up appreciation, emerging economies are unwilling to accept the 'beggar thy neighbor' policy. The new rounds of QE and currency tensions are particularly influential for gold and the precious metal complex......Read the entire article.

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