UBS Says QE's End May Render Gold 'Obsolete'

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Swiss bank UBS is warning that gold's appeal as an inflation hedge and as an alternative to the U.S. dollar is at risk of becoming "obsolete" after the Federal Reserve last week began preparing markets for a wind-down of its stimulus program, possibly by the end of the year.

The most explicit signal yet from Federal Reserve Chairman Ben Bernanke on Wednesday that the U.S. central bank was considering scaling back its $85 billion per month of Treasurys and mortgage-backed debt purchases sparked a 5 percent rout in the bullion market.

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Gold's latest sell-off, its worst since the 2008 global financial crisis, prompted a number of investment banks to cut their 3-month and full-year forecasts sharply for the precious metal. Many now believe normalization of the Federal Reserve policy will remove a major pillar of support that has driven gold prices to a record high near $1,920 in September 2011.

An accommodative Fed helped gold generate positive average yearly returns of 17.4 percent in the three years up to the end of 2012, UBS noted in a research report last week. "Over that period, the yellow metal benefited from its role as insurance against a very expansionary monetary policy in the U.S.," UBS' Dominic Schnider and Giovanni Staunovo wrote in the report.

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"With the Fed indicating that economic downside risks have diminished, the door is open for the current QE [quantitative easing] purchases to be tapered off later this year. We believe that investors are likely to regard QE-insurance [a.k.a. gold] as obsolete in a low inflation environment where the U.S. dollar trades on the strong side," they said.

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Financial investors will "shy away" from gold as an insurance against additional rounds of quantitative easing, for at least the next 12 months, UBS warned. Gold may drop to $1,150 an ounce in the coming 3 months, according to the Swiss bank which also lowered its 12-month gold forecast to $1,050 from $1,750 prior.