London Gold Market Report

WHOLESALE MARKET gold prices traded around $1730 an ounce Thursday morning in London, a few Dollars below where they started the week, while stock markets ticked lower ahead of today's policy announcement by the US Federal Reserve.

Silver prices hovered around $33.10 per ounce – 1.8% down on the week – while other commodities were also broadly flat and US Treasuries gained.

A poll by newswire Reuters suggests economists see a 65% chance the Fed will announce a third round of quantitative easing (QE3) later today.

"If we do see a QE3 announcement, gold is likely to race through $1800 an ounce," reckons Chen Min at Jinrui Futures in China.

"But we also need to realize that the marginal effect of quantitative easing will diminish and it will be too optimistic to expect gold to break above $1850 even if QE3 is announced."

"Although [earlier QE] has helped kick-start some growth in the US," adds INTL FCStone analyst Ed Meir, "the fact that we are once again at the 'money trough' is not very reassuring. We will have to see if investors reach the same conclusion in the weeks ahead, particularly if they see no immediate improvement in the macro numbers."

August's official nonfarm payrolls report, published last Friday, showed the US economy added fewer jobs than expected last month, while previous estimates for June and July were revised lower. Dollar gold prices jumped to six-month highs following publication of the report.

"Last week's surge in the gold price has made us change our medium term outlook, with this now being bullish," says Commerzbank senior technical analyst Axel Rudolph.

"People have priced in quantitative easing and the disappointment factor is very high," warns Bayram Dincer at LGT Capital Management in Switzerland.

"If this quantitative easing does not materialize, you'd surely see prices fall."

Some analysts have suggested that rather than announce an asset purchase program of fixed size and duration, as was the case with QE1 and QE2, the Fed may instead opt for an open-ended approach, or could try some other policy.

"A very positive [market] response would probably occur if the Fed tried something else," says today's currencies note from Standard Bank.

"This could be a reduction in the rate on excess reserves to zero, the setting of a yield target, the setting of some other target that governs the longevity of QE, like an inflation and/or unemployment target, and a funding-for-lending scheme similar to the UK...however, we are not sold on the idea that the Fed will go to this next level."

On the currency markets, the US Dollar Index, which measures the Dollar's strength against six other major currencies, remained below 80 this morning, after falling below that level for the first time since May on Tuesday. Sterling and Euro gold prices were down around 1% on the week this morning, with both currencies having gained against the Dollar in recent days.

Over in Europe, Spain's debt-to-GDP ratio could hit 104% by 2016 if the country manages to deliver half of its agreed "structural adjustment" for this financial year, according to the European Central Bank's monthly report published Thursday. A similar scenario for Italy would see the debt-to-GDP ratio hit 125% next year, the report adds.

Elsewhere in Europe, yesterday's Dutch general election saw Mark Rutte returned as prime minister, with his Liberal Party and its main opposition Labor gaining support at the expense of more Eurosceptic parties, the Financial Times reports.

Switzerland's central bank meantime left its minimum exchange rate against the Euro unchanged at SFr1.20 this morning.

"The Swiss National Bank...will continue to enforce [the exchange rate floor] with the utmost determination," said a statement from the SNB.

"It remains committed to buying foreign currency in unlimited quantities for this purpose."

In South Africa, newspapers report striking gold miners marched to hostels and mine shafts at the Gold Fields KDC West mine to prevent non-strikers from working. Around 15000 workers at KDC West began striking on Sunday.

There have been calls for a nationwide mining strike following a series of disturbances of several platinum and gold mining sites, including Lonmin's Marikana platinum mine, where 45 people have died since protests began, including 34 shot dead by police last month.

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics. Ben writes and presents BullionVault's weekly gold market summary on YouTube and can be found on Google+