JPMorgan Says "Buy Gold"

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The FOMC shocked markets by deciding not to slow its large-scale asset purchase program, after all the signals it had sent out in previous months that it would do so. While increasing policy risk, JPMorgan notes, this puts the asset-reflation trades back on the table. In their view, the main driver of gold’s performance over the past five years has been QE. As QE continued and inflation expectations remained subdued, the demand for an inflation hedge subsided, ETF positions were unwound and gold prices fell. However, JPM now believes, as a result of the Fed's volte-face on tapering, uncertainty about future inflation may pick up and suggest a long position in gold. Of course, the question is - are they buying or is this a last ditch effort to drain what little remaining gold they have in their vault to their hapless clients?

JPMorgan On Gold:

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.

As QE continued and inflation expectations remained subdued, this demand for an inflation hedge subsided, ETF positions were unwound and gold prices fell. Along with precious metals rallying, inflation breakevens widened following the Fed announcement, another indication that uncertainty around future inflation may pick up as a result of the Fed’s volte-face on tapering.

Additionally, positions are much cleaner now, following the unwinding of ETF positions, and physical demand from retail buyers in Asia has been very strong.

We open a long position in gold.

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They are the ones that caused the price of the gold to tumble so low, now they want others to do their dirty work and to get the price back where it was without paying too much. And they say that the market regulates itself.

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