(MENAFN- Arab Times) A report issued by "KFH Research" Ltd, a subsidiary of Kuwait Finance House "KFH" stated that gold prices will remain high in the short term in light of developments in the US economy and the stop of selling gold in large quantities. The details are as follows: Gold surged by 5% in the previous session, the largest rally in percentage terms since March 2009, following the US Federal Reserves unexpected decision to maintain its monetary stimulus. The FOMCs meeting on Sept 17-18, 2013 ended with a surprise decision by the Fed policymakers to continue with QE3 i.e. purchase of $40bln agency mortgage-backed securities (MBS) per month and $45bln longer-term Treasury securities per month.
Markets were expecting a reduction in the $85b per month asset purchase programme by between $5bln to $10bln per month. This was largely based upon minutes of the 30-31 July 2013s FOMC meeting and after Fed official spent months alerting the public that the Feds policymakers were generally agreeable to begin the tapering "later this year". The bond-buying programme, also known as quantitative easing, or QE, was relaunched last year and is meant to stimulate economic growth and hiring by holding down interest rates and encouraging households and businesses to spend and invest. This round of purchases, together with earlier efforts along the same lines, has swelled the Feds holdings of securities to nearly $4tln.
The Fed also voted to keep short-term interest rates near zero, where they have been pinned since late 2008. Most officials indicated in their latest economic projections they expect to make the first rate increase in 2015 or later. Gold tacked on more than $30 an ounce in the minutes after the central banks statement and rose as high as $1,375.81 an ounce before settling at $1,366.73 an ounce at the end of the day. Gold remained at above $1,350 an ounce on 20 September 2013. Higher gold prices were also seen in local currencies, both in the developed and emerging markets. Fed Chairman Ben Bernanke said "conditions in the job market today are still far from what all of us would like to see" at a press conference after the announcement. In August 2013, the US added 169,000 jobs below consensus expectations of 180,000, while June and July 2013 estimates were revised down by a total of 74,000.
It is estimated that the US would take more than six years to get back to pre-recession employment levels, after adjusting for population growth. Layoffs have fallen to pre-crisis levels, but hiring has shown little improvement over the past year. Although unemployment rate declined to 7.3% in August 2013, the labour participation rate, which tallies the share of the US civilian labour force holding jobs, was 63.2% in August 2013-its lowest level in 35 years. By contrast, joblessness was only 5% at the end of 2007, and the labour participation rate then was 66%.
Furthermore, a recent rise in interest rates - due in part to fears of a looming "taper" in Fed asset purchases - are threatening to weigh on the US housing recovery. The average interest rate on a 30-year fixed home loan remained high at 4.75% as at Sept 13, 2013, compared with a record-low 3.47% in December 2012. The rate has risen since May 2013 since Fed Chairman Bernanke that month indicated the central bank may slow its purchases of government and mortgage bonds. As such, the Federal Reserve lowered their growth estimates for this year and next - and expressed worry that a jump in long-term interest rates over the past several months could squeeze an already weak upturn.
Such caution is largely due to the potential growth-constraining factors like the on-going fiscal retrenchment and the impact of the recent tightening in financial conditions (i.e. the rise in US Treasury yields and mortgage rates) on business investment and the nascent housing market recovery. Tapering is off the table for now (at least until the December 17-18 meeting) so investors focus will probably shift to the US debt ceiling and situation in the Middle East region. Though Fed Chairman Ben Bernanke said that there is no "fixed calendar" for a reduction in the central banks bond purchases, the Fed is widely expected to begin curtailing its $85bln-a-month program in the next 12 months. This suggests that this years sell-off in gold will pause and is expected to remain high in the short term as buyers reassess their expectations for inflation. According to a Bloomberg survey, gold prices is expected to average $1,331 an ounce in 3Q13 before improving to $1,369 an ounce by year-end.
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