23 September 2013, 13:17

JP Morgan recommends buying gold

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One of the biggest global banks believes that the ultra-loose monetary policy of the US Federal Reserve will make the price of gold go up.

The results of the recent Fed meeting shocked the investing world. Ben Bernanke and his fellow members of the Federal Open Market Committee have decided that the US economy is not ready for a reduction of the Fed’s bond buying program. The so-called “tapering” has been put on hold until there are clear signs of significant economic growth. In layman's terms, this decision means that the US Federal Reserve will continue to print money and buy US treasury bonds allowing the US government to finance its gargantuan budgetary deficit. A side effect of such debt monetization efforts is a spill-over of liquidity in financial markets. When an ever-increasing amount of money chases the same amount of goods, prices are bound to go up.

JP Morgan’s analysts believe that gold will benefit from the continuation of Fed’s “quantitative easing” program, therefore they advise their clients to buy the yellow metal.

Zerohedge quoted the rationale presented by the JP Morgan research team to its clients: “This week’s surprise by the Fed in not tapering their asset purchases led to a 5% rally in precious metals. In our view, the main driver of gold’s performance over the past five years has been QE. Following the 2008 crisis, the unprecedented expansion of central bank balance sheets led to fears of inflation further down the road and resulted in very strong demand for gold, a large amount of which came via ETFs… We open a long position in gold.”

In the first nine months of 2013, gold prices have been on a steady downtrend which made the small and short-term investors liquidate their holdings. A renewal of the long-term upward trend is likely to entice those who sold their gold investments to buy again, exacerbating the price rise. If the Fed officially gives up on tapering in 2014, then the gold price gold easily reach record levels of 2,000 dollars per ounce.

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