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Gold drops as Bernanke disappoints on QE

by Sarah Miloudi on Feb 29, 2012 at 17:46

Gold drops  as Bernanke disappoints on QE

Gold has shed 5% after US Federal Reserve chairman Ben Bernanke dashed traders' hopes of further monetary easing.

In early London trade, the precious metal rode high at around at $1,790 an ounce, however as Bernanke's testimonial disappointed, gold dropped by around $84.

Although the Fed chief's statement suggested he remains relatively downbeat on the US economy, analysts said there was little in this testimony that pointed to a third round of quantitative easing (QE).

'There is nothing in these prepared comments which would suggest that the FOMC is even vaguely considering more QE, or even a top-up of its Operation Twist, which may disappoint some of the purely "liquidity driven" and self-serving market participants,' Marc Ostwald, of Monument Securities, explained.

While the recovery of the US economy has undoubtedly continued, with the latest revision to fourth quarter GDP data pushing the figure up 0.2%, America's expansion has been fairly uneven and muted when compared to historic standards.

Even so, many had hoped that following the European Central Bank's launch of a second Long-Term Refinancing Operation (LTRO) earlier today that America's Federal Reserve would continue the trend to boost liquidity in the system, by hinting at more QE sometime over the shorter term.

But Ostwald pointed out that the testimonial of the Federal Reverse's Open Market Committee reflects the views of all of its members, so investors who had expected an announcement on liquidity in this afternoon's statement should have realised the error of their ways well before Bernanke's testimony was delivered.

Ostwald said: 'This testimony is meant to represent the views of the whole of the FOMC, and the enormous divergence of opinions on the FOMC should have long been clear to every market participant for some months - thus expecting any hints on more QE or a further round of Operation Twist was at best naive, both from the aspect of there still being another four months of Operation Twist to run, and the aforementioned well advertised lack of FOMC consensus on policy and the overall outlook.'

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