Gold Price Rebounds, $1 Trillion in QE3 Looming?

GOLD PRICE NEWS – The gold price rebounded from earlier losses Friday morning to trade back near unchanged at $1,658 per ounce.  The spot price of gold initially fell to $1,644.20 amid profit taking in the yellow metal, but bounced back after a worse than expected report on existing home sales in the U.S.  The SPDR Gold Trust (GLD), the world’s largest gold ETF and gold price proxy, recovered from an intra-day low of $159.95 to $161.39 per share.

Silver futures turned higher alongside the gold price, as the COMEX February contract reached $30.75 after earlier falling to $30.28 per ounce.  Other precious metals were mixed, with platinum rising 0.4% to $1,523.50 per ounce and palladium dipping 0.8% to $673.15 per ounce.  Among cyclical commodities, copper futures fell 0.6% to $3.78 per pound and crude oil slid 1.9% to $98.68 per barrel.

Gold shares rebounded in concert with the gold price, as the Market Vectors Gold Miners ETF (GDX) climbed 0.8% to $52.54 per share.  Barrick Gold (ABX), the world’s largest gold producer, rose 1.0% to $46.94 per share.  Newmont Mining (NEM), the largest U.S.-based gold miner and the only gold stock included in the S&P 500 Index, added 0.6% to $59.95 per share.  Other notable advancers included Goldcorp (GG) and Kinross Gold (KGC), which jumped 1.0% and 2.5%, respectively.

The gold price reacted positively to the last report in a busy week of U.S. economic data.  Existing home sales for December increased 5.0% on a month-over-month basis, below the 5.2% consensus estimate among economists.  The worse than expected report confirmed comments made earlier this week by Federal Reserve Governor Elizabeth Duke on the challenges that remain in the housing market.

“One of the questions that potential buyers or potential investors are looking at is how much inventory is there still to come on the market,” Duke stated. “Such low levels of sales” suggest “it’s still going to be a long time before the inventory backlog is worked through.”

Despite several encouraging reports in other sectors of the economy, the housing market continues to be a significant drag on U.S. economic growth.  The Fed has discussed these headwinds in considerable detail in nearly every edition of the FOMC minutes and the Beige Book in recent years.  As a result, a growing set of economists see the Fed launching a third round of quantitative easing (QE3) this year.  In contrast to the first two rounds, however, QE3 is expected to concentrate specifically on the purchase of mortgage-backed securities to help alleviate problems in the housing market.

Miller Tabak’s chief economic strategist, Andrew Wilkinson, contended in a note to clients yesterday that the Fed should launch a $1 trillion QE3 plan in the near future.  “There seems little point in waiting to implement further easing, and to do so could confuse the message the Fed is trying to deliver at a point in time when it is trying to make its communication with the public clearer.”  If Ben Bernanke and his fellow central bankers take Wilkinson’s advice, the price of gold is likely to be one of the prime beneficiaries of such monetary policy.