QE3, $2,200 Gold Ahead This Year, Says Morgan Stanley

The Federal Reserve will launch a third round of quantitative easing (QE3) and the price of gold will reach a new all-time record high above $2,200 per ounce later this year, according to analysts at Morgan Stanley.

In a recent report to clients, the Wall Street investment bank named gold among its top picks for 2012 and forecasted an average price of $2,200 per ounce.

Morgan Stanley’s view is based on part on Ben Bernanke launching a third round of asset purchases. Vince Reinhart – the firm’s chief U.S. economist and a former Federal Reserve official for 17 years – wrote the following:

The unwind of the negative shocks from Japan’s earthquake and the run-up in energy prices earlier in the year are responsible for the recent run of strong data in the US economy..Once these tailwinds have played out and a shallow fiscal pothole emerges, growth should slow to around 2% in early 2012. As a result, the Fed will probably mark down its growth and inflation forecasts. The deceleration will likely be enough to convince the FOMC that the downside risks to its dual objectives of maximum employment and stable prices need to be addressed. However, given the ambiguity in the Federal Reserve Act about how to weigh these objectives against each other, disagreement within the FOMC itself about the relative weights and Bernanke’s efforts to create a more democratic process for decision-making, progress on another QE package is likely to be slow and full of compromise. Eventually though, we believe that a package of Treasury and MBS purchases of US$500-750 billion will arrive some time between March and June.