Gold Jumped More than 2% on QE3

By Roger Baettig | September 14 2012 3:49 AM

Market sentiment was lifted as the Fed announced purchases of agency mortgage-backed securities, starting tomorrow at a total of US$23B through the end of the month and then at a rate of US$40B per month for an open-ended period. The Fed also decided to extend operation twist through the year end and pledged to leave interest rates at exceptionally low level until mid-2015. Financial markets rallied with the DJIA and the S&P 500 indices gaining +1.55% and +1.63% respectively. In the commodity sector, crude oil prices soared with the front-month contract for WTI crude oil rising to a 6-month high of 98.58 before settling at 98.31, up +1.34%, while the Brent crude contract gained +0.49%. Both benchmarks continued to climb higher in Asian session today. Gold surged to a 6-month high and ended the day at 1772.1, up +2.21%. Selloff in the USD after announcement of QE3 pushed the yellow metal higher.

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Chairman Ben Bernanke announced a number of policy changes to stimulate the US economy. First, he initiated purchases of agency mortgage-backed securities, starting tomorrow at a total of US$23B through the end of the month and then at a rate of US$40B per month for an open-ended period. Buying would continue until the employment market has shown desirable improvement. This program, as we mentioned in our preview would be different from the previous one which had defined a fixed period and amount. The Fed maintained the option to alter the "size, pace and composition of its asset purchases" as appropriate, suggesting the purchase amounts might be adjusted depending on economic conditions. Meanwhile, operation twist will continue through the year-end.

The interest rate guidance was adjusted as policymakers decided to keep the Fed funds rate at 0-0.25% "at least through mid-2015" from previous forecast of "late-2014". More importantly, the Fed stated that it "expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable length of time after the economic recovery strengthens". This is a strong language than previously and indicates the Fed's commitments to leave interest rates at low levels even if the outlook begins to improve.

On the dataflow, the US headline CPI probably rose to +1.6% y/y in August from+1.4% a month ago while core inflation eased to +2.0% from +2.1% in July. Retail sales probably added +0.7% m/m in August, down from +0.8% in July. Excluding auto, growth in retail sales might have eased to +0.6% from +0.8% in July. Flash reading of University of Michigan confidence index probably shows a dip of -0.3 points to 74 in September.