Further Fed Easing to Boost Gold: Societe Generale

Fears that the U.S. economy may lose momentum this year could build the case for a third round of stimulus from the Federal Reserve and strengthen the price of gold, Societe Generale said in a research note on Tuesday.

Pouring molten gold
Pouring molten gold

Gold has rallied from its December 29th low of $1520 an ounce, but it has lagged the stock market in recent months. While the S&P 500 posted its best first quarter in more than a decade with a 12 percent gain, gold rose just 6.6 percent.

“We consider the drop in the gold price to be a buying opportunity as we expect the U.S. economy to surprise on the downside over coming months, which should result in the implementation of QE3,” Robin Bhar, Director, Head of Metals Research at Societe Generale said, maintaining the bank’s medium-term bullish stance on the precious metal.

“The markets remain concerned about the possibility of further QE/liquidity increases in Europe and the U.S., allied to negative real interest rates worldwide.”

On a cautionary note, Bhar added that central bank gold purchases are unlikely to increase in 2012 by the same amount as in 2011, although they should still be supportive.

“Central banks remain favorable towards gold,” he said. “The latest figures from the IMF do not show any dramatic changes among individual members in November but the World Gold Council's published estimate for the first nine months of the year is for an increase of 348.9 tons; it is possible that purchases reached 500 tons last year.”

Tom Essaye, President at Kinsale Trading agreed that the gold price currently looked “pretty compelling” as an entry point. Still, he said he’s nervous in the very short-term about a decline.

“We’re in that transition period where the market expects us to transition out of additional stimulus to an economy standing on its own two feet, and that’s why we saw recent weakness in gold,” Essaye told CNBC on Tuesday in Singapore.

“Nonetheless, I think we're actually going to see rising inflation here in the U.S. and that’s going to cause real interest rates to turn more negative, which is bullish for gold. So I would be a buyer of gold at these levels with the caveat that in the next couple of weeks you could see a little bit of short-term weakness.”

Dominic Schnider, Head of Commodity Research at UBS Wealth Management is downbeat on gold's prospects and recently lowered his 12-month price forecast to $1,820 an ounce from $2,200 previously on lower than expected financial demand.

"With the upward trend since 2008 likely to be broken in 2Q 2012, we additionally shifted our short-term view from bullish to sideways and lowered the 3-month trading range to $1,520-$1,750 from $1,585-$1,920," Schnider said on March 30.

"Based on possible downside risks in the short run, investors holding gold should buy some protection," he added. "New positions should not be built up at current levels, nor should investors sell insurance for a premium."

Gold prices fell 2 percent in U.S. trading on Tuesday, its biggest one-day drop in a month, tumbling after the Federal Reserve released minutes of its March meeting, suggesting to investors that policy makers were growing less eager to launch additional monetary stimulus measures, Reuters reported.

John Kilduff, Founding Partner at Again Capital said there's "growing concern" whether the U.S. economy can sustain its growth trajectory in the second half of the year. "You're hearing about this whole situation with our budget; budget cuts, tax regime...who's going to win out in the elections. It's really a lot of uncertainty, which is a word you almost hate to use because we overused it last year, but it's going to creep back into the lexicon."

The bottom line, Kilduff said, is "we're going to need more in massive QE3-type stimulus for gold to get back up. You need the U.S. Fed pumping the dollars out there to get the gold up to the $2,000/$2,200 mark. Without it...the best you can hope for I think is $1,800."