–Gold likely to reach $2,400 in 24 months -BofA Merrill Lynch
–QE3 to bolster gold demand, stoke inflation expectations
–Gold unlikely to dip below $1,500 amid demand from emerging markets
By Tatyana Shumsky
Gold prices will reach $2,400 a troy ounce by the end of 2014 on the Federal Reserve’s third stimulus program, and aren’t likely to drop below $1,500 amid support from consumers in emerging markets, analysts at Bank of America Merrill Lynch said in a report.
The Fed’s third bond purchasing program, commonly known as QE3 and announced Sept. 13, will see the central bank buy around $40 billion in mortgage-backed debt each month in an effort to reduce borrowing costs and stoke economic growth. The liquidity injection comes in addition to “Operation Twist”, the Fed’s effort to reduce long-term borrowing rates by buying longer-dated Treasurys and selling short-term debt.
While investors widely expected broad easy-money measures, few in the market could pinpoint the exact route the Fed would take.
“The Fed’s announcement was on the aggressive side of expectations,” analysts at BofA Merrill Lynch said in a report.
“Given the new open-ended nature of QE3, the upward pressure on gold prices should continue until employment is strong enough to require a change in policy. In our view, this is unlikely to happen until the end of 2014,” they said.
The bank introduced a 24-month gold price target of $2,400 a troy ounce in response to the Fed’s easy-money efforts. The new price target reflects expectations that the Fed will continue QE3 until the end of 2014, as well as extend Operation Twist beyond December 2012, the bank said.
BofA Merrill Lynch also reiterated its six-month price target of $2,000 a troy ounce.
Moreover, gold prices are unlikely to dip below a “floor” price level of $1,500 a troy ounce over the next decade amid supportive demand from buyers in emerging markets, BofA Merrill Lynch said.
“With emerging markets getting richer, their budget allocation to non-essential items such as gold will likely increase in the long-run,” the bank said.
Gold’s recent gains reflect a sharp uptick in inflation expectations, with inflation over the five years starting in 2017 now seen running above 3%, BofA Merrill Lynch said.