Gold Approaches 1400 as QE2 Stokes Inflation

Gold rallied to a new record high of 1349 before settling at 1383.1 yesterday. The +3.4% rise was the biggest daily gain since March and was mainly driven by renewed selling pressure in USD and anticipated impacts of QE2. Following gold's suit, silver jumped +6.58% and ended the day at 26.043, the highest level since 1980. Crude oil surged +2.13% as the rally accelerated after a firm break of 85. The front-month contract ended the day at 86.49. Apart from weak dollar and strong equities, OPEC's comments that oil at 90 would not hinder global growth boosted oil prices further. Prices continued to climb higher in Asian session Friday as the market remained buoyant by the 'Bernanke put'.

Fed's official return to QE has remained the theme in financial markets. Risk appetite increased on hopes that the asset-buying program should help revive the US recovery. Wall Street jumped. Both DJIA and S&P 500 soared to 2-year highs with gains of +1.96% and +1.93% respectively. US Treasuries plunged as the Fed's open-ended monetary approach signals more easing to come. The dollar received renewed selling pressures with the USD Index slumping to an 11-month low. Most currencies rose against USD and New Zealand dollar was the best performer (+2.1%), probably driven by the encouraging labor force report in 3Q10. AUDUSD stays comfortably above 1 after a firm break on Wednesday.

ECB and BOE met yesterday but these were non-events when compared with the FOMC and RBA meetings earlier in the week. Both the ECB and BOE left policy rates unchanged and maintained economic outlook largely similar to a month ago. British pound rallied more than +1% against the dollar as BOE's risks to expand the size of the asset-buying program have reduced for now, given stronger-than-expected economic data.

As we mentioned ahead of the FOMC announcement, gold's uptrend would remain intact no matter what the Fed announces. The current program is largely in line with market expectations and is reasonably bullish for gold.

The yellow metal has as appeal as an inflation hedge and Fed's new round of money-printing has presented a good reason for investors to worry about inflation. Yields of 10-year TIPS fell to a record low of 0.409%, indicating expectations that Fed's measures will bring inflation back. The chart below shows the negative correlation between gold price and TIPS.

Crude oil also strengthened as a dollar-denominated asset. Apart from the optimism in the macroeconomic outlook, OPEC's comments that oil price at 90 is not detrimental to global economic recovery suggest further upside in oil prices. The cartel believes price will not rise to as high as 100 in 2011.

Focus is shifted to US' employment report for October. The Labor Department will probably report payrolls addition of +63K in October, following a -95K contraction in the prior month, and an unemployment rate of 9.6%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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