Gold's surge to a new record high above 1900 signaled investors remained cautious in the global economic outlook. Threats of intervention from the SNB and the BOJ, together with speculations of QE3, sent the market to gold as it's considered as the ultimate safe haven and a store of value. The benchmark Comex contract breached 1900 for the first time on record yesterday and closed at 1891.9. In Asian session today, the metal extended gains to a new high of 1918.9. As we mentioned in our article on August 13, gold would have to rise +20% more to reach the level 1980's level in inflation-adjusted term and the period from 3Q07 to 1Q08. Indeed, price has risen around +10% since the report, suggesting the metal may have further upside of +10%. However, investors should caution that a bubble may have started to form by then. Oil prices were affected by geopolitical tensions in Libya. Brent crude oil plunged as much as -3.19% at one point amid expectations that oil production in the region will resume soon. Looses were pared later in the day as stock markets advanced. The front-month Brent crude contract ended up losing -0.24% while the equivalent WTI crude contract soared +2.63%.
As recent economic indicators have given more evidence that the US economy may be entering a double-dip recession, there have been increasing speculations that the Fed will implement further easing measures sooner rather than later. It's highly expected that Fed Chairman Ben Bernanke will signal a new round of quantitative easing measures (QE3) at the annual Jackson Hole symposium. While the Chairman did similar thing by hinting QE2 last year, the economic situation has changed. The FOMC members are more divided than before with 3 voting presidents disfavoring the announcement of keeping interest rates at exceptionally low levels at least until mid-2013. There is more dissension among policy makers than at any time since 1992. US inflation has been picking up in recent months while it was subdued the same period last year. Headline CPI was in the negative territory in the second quarter of last year, only to return to positive in the third quarter with the 3-month average CPI from July to September staying at only +0.23%. The latest inflation data showed that July's CPI jumped +0.5% as driven by rises in food and energy prices. In 2Q11, headline inflation soared to +0.4% despite June's contraction. The situation has obviously increased the complexity of delivering easing measures this year.
Quantitative easing is effectively a money-printing measure and would help depreciate the US dollar. Last year, gold rallied to record highs 2 weeks before the Jackson Hole symposium and immediately after the announcement of QE2 at the November FOMC meeting. Investors desired to put their capital in an asset that won't depreciate. They are doing the same this year. In addition to QE3 speculations, intervention threats from the SNB and the BOJ have also made investors lose confidence on fiat currencies. Investors speculated the SNB would set a target for EURCHF to at least 1.2. Last week, the SNB said it would further boost liquidity by expanding sight deposits to CHF 200B from CHF 120B. More actions will follow when necessary. In Japan, more and more government officials expressed their concerns over yen's strength. Finance Minister Yoshihiko Noda said that he will take 'bold actions [to curb yen's appreciation] if necessary'. The market expected the Bank of Japan will announce further easing measures at the September meeting, depending on Fed's move over coming weeks. At the August meeting, the BOJ increased the total size of the Asset Purchase Program to about 50 trillion yen from 40 trillion yen and maintained the uncollateralized overnight call rate at around 0-0.1%.
On the dataflow, Eurozone's manufacturing PMI probably fell to 49.5 from 50.4 in August, suggesting the region's manufacturing sector has fallen to contractionary territory. Germany's ZEW survey probably showed a drop of economic sentiment to -26 in August from -15.1 in July. Confidence on the current situation also slipped to 85 in August from 90.6 a month ago. In the US, new home sales might have increased modestly, by +0.96%, to 315K in July.