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Gold Rush Back on Track, HSBC

Further Quantitative Easing across the world has given a very strong push to the
gold price that will continue, according to HSBC Private Bank’s Esty Dwek.

Dwek is an investment strategist with HSBC and she believes the stimulus
measures recently announced by the Federal Reserve, the European Central Bank, and
the Bank of Japan will lead to a significant boost in investor sentiment over what we have
already seen, as well as higher inflation concerns and a softer U.S. dollar. All of these
conditions are good for gold bullion.

After nearly a year of range-trading, gold is on its way up again, thanks mainly to
what is being called QE Infinity, Dwek said. This is the third round of quantitative easing
announced by the Federal Reserve and unlimited in time and scope, according to Dwek.

She pointed out that aggressive action by the ECB, the Bank of England, and the
Bank of Japan are also supporting the gold price, in the view of HSBC.

Bullion has been range-bound between $1,500 per troy ounce and just under
$1,800 per troy ounce during this period, but Dwek believes recent flirtations with a
breach of $1,800 will soon be realized and gold will continue to gather momentum.

An important side-effect of the central bank interventions is the weakness in the
U.S. dollar, both a result of currency debasement b the Fed’s ongoing money-printing and
the reduced tail risk in Europe, which is providing some support for the euro.

In the view at HSBC put forward by Dwek, the dollar strength had been one of
the main hurdles for the gold price, but should no longer be. Gold and the dollar tend to
be strongly negatively correlated, except in times of extreme risk aversion, according to
Dwek.

She explains this is because dollar weakness makes the price of gold in local
currency terms cheaper for emerging market buyers.

HSBC, as Dwek pointed out, believes that emerging market currencies will
rise against the dollar as a result of improving investment environments as well as a
debasement of the dollar, which is a direct result of the fiscal stimulus measures. These
conditions should benefit support demand for gold, as well.

Particularly over the medium-term, according to Dwek, the huge amount of
liquidity that is being injected into the financial system by central banks is leading to
higher inflation expectations.

As evidence of that, she points out that five-year breakeven rates in U.S. bond
markets have jumped in the past few months, an indication that investors expect the
current monetary easing to lead to inflation further down the line.

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