Will Fed’s ‘QE-Infinity’ Push Gold Up to $2,400?

BofA Analyst: Gold Will Hit $2,400 in 2 Years

Francisco Blanch, head of global commodities at Bank of America Merrill Lynch, makes a bullish call in the precious metal and lays out the risks.

“The new target reflects our view that the Fed will maintain mortgage purchases until the end of 2014 and will move to buy Treasuries following the end of Operation Twist this coming December,” wrote Francisco Blanch, a global investment strategist with Bank of America Merrill Lynch, in a note to clients Tuesday.

“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,” Blanch added. “In our view, this is unlikely to happen until the end of 2014.”

Gold is up two percent since the Fed’s statement as others besides Bank of America pile into the metal on fear these actions may spark inflation and leave the metal as the only store of value in a world of paper currencies. Morgan Stanley also upped its gold forecast today, saying the metal would average about $1,800 an ounce next year.

VIDEO TRANSCRIPT:

Thanks for having me.

2,400 in two years for gold, this is all about central banks?

Well, look, i mean the fed’s going to be printing about $40 billion a month. and buying mortgages with that. and they will also be purchasing, we believe, starting next year when operations come to an end.

That is a lot of money.

We think the fed could be adding close to $2 trillion to the balance sheet over the next couple of years. and that frankly, is a tremendous expansion of the monetary supply.

Francisco, i’m with you 100%, i think embedded within that is the fear that, you know, via currencies and wealth, to a certain extent, that’s what we have here. i’m with you on this 4400, did you factor in at any point hedging points?

Gold hedging for their company’s completely off the table. right. I mean, the miners have been really pulling back on their hedges for several years now.

I think we can start to see some more interests in hedging at high levels. But, frankly, to be honest, the core message here is that investors will continue to buy gold as long as the federal reserve is printing. And if you look at the last 18 months or so, gold prices really haven’t done much. And i think the reason why is that we’ve had pretty much a flat line on the fed’s balance sheet.

We saw pretty tremendous increase during q-1 and qe-2, and now we’ve been sort of flat lined for the last 16, 18 months, and now the fed’s going to start bringing its balance sheet into a much larger size again. So that’s a lot more money, and that money has got to go somewhere, you know.

Where do the risks lie to this call? Which is a big call.

We’re at 1,700 right now, and change. one is that the fed has to reverse policy because inflation picks up unexpectedly. We’ve seen indicators such as the five-year forward, which is a measure of interest rates, of inflation expectations five years from now. We’ve seen that rising pretty quickly, it’s around 3%, which is well above the average inflation of the past ten years. so that is a clear risk. The fed realizes the inflationary policy and has to start cutting it back.

The other risk, frankly, is the fiscal cliff. any contraction in fiscal spending could be negative for gold prices going into the end of the year. and i think — i think perhaps that’s one of the markets most focused on. If we do get a major fiscal cliff, if we lose several percentage points of gdp going into january of next year, that could be negative for gold….

I don’t think republicans or democrats have taken the curtailment very seriously so far. so, you know, I think — that’s an understatement. it’s a concern, but it’s not — I think it’ll come to pass.

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