PRECIOUS METALS REACT TO FED ANNOUNCEMENT
This week’s financial news revolved around the Federal Open Market Committee (FOMC) meeting and the future of their monetary easing program. On Monday, while the stock market and U.S. dollar indexes rose in anticipation of the FOMC meeting, Gold headed the other way. The Gold price closed last week on a higher note on strong bullion demand, a drop in the U.S. stock market and rising tension in the Middle East. Monday, investors were once again considering the actions the U.S. Federal Reserve may take. Any easing of bond-buying programs, raising the prospect of future rate tightening, is seen as unfavorable for Gold. Rising rates also raise the opportunity cost for holding a Precious Metal that has no interest rate. The Gold price was down again Tuesday as anticipation built for the announcement of a possible decline in monetary stimulus. The $85 billion in monthly mortgage backed securities and treasury debt have been perpetuated by the Fed to boost a lagging U.S. economy. Both Precious Metals and stocks have benefited greatly but the fundamental emphasis set forth by the Fed was to reach a specific reduction in domestic unemployment. A division exists between analysts who believe tapering is necessary and others who consider the discussion to be premature. Precious Metals have been trading in a tight range without any motivating factors to break out of current levels. On Wednesday afternoon, Precious Metals prices began to fall after Fed Chairman Ben Bernanke announced the probability of reducing asset purchasing by the end of 2013 and completely ending it in 2014. Bernanke made it clear, however, that how the economy performs will determine how the Fed will proceed, stating, “If you draw the conclusion that I've just said that our purchases will end in the middle of next year, you've drawn the wrong conclusion, because our purchases are tied to what happens in the economy.” The market is still in limbo as investors are aware of the Fed’s fiscal plans, but they’re not certain of the exact timeframe. “We pretty much have a Fed statement and summary of economic projections that leave us believing what we believed yesterday, which is the Fed is going to taper at some point, maybe at the end of this year, maybe in 2014," Lazard Capital Markets’ managing director Art Hogan said. After Bernanke hinted at the end of their monetary easing policy Wednesday, the Precious Metals market started moving downward and didn’t stopped Thursday. However, the U.S. stimulus policy is not the only issue weighing on the price of Precious Metals. "We're seeing a stronger U.S. dollar, real rates are looking quite strong, inflation is very low and U.S. 10-year yields are at 2.4 percent. In that environment, Gold is going to suffer,” Deutsche Bank analyst Daniel Brebner said. The Gold price recovered some ground in overnight trading Thursday after hitting near three-year lows. After the U.S. stock market opened Friday, the Precious Metal has remained mostly flat, inching its way into positive territory. At this rate, when the day is over, Gold will have stayed on track for its biggest weekly drop in almost two years and the Fed’s announcement is mostly to blame. Quantitative easing (QE) has weakened the U.S. dollar, making it more advantageous to own Gold. Physical buying in India was slow despite Thursday’s price drop, while demand in China was higher.
ALL MARKETS FELT THE FED’S EFFECTS
While the Gold price was moving lower, the equities market started in the opposite direction. Following a week that saw equities drop more than 1 percent, stocks were gaining abruptly Monday ahead of expectations for the outcome of this week’s FOMC meeting. Over the last few years, investors and traders alike remain intently focused each time Fed Chairman Ben Bernanke is set to discuss the Fed’s assessment of the economy and its strategy going forward. Regarding this week’s Fed meeting, Daiwa Capital Markets’s Chris Scicluna wrote, “While policy is obviously widely expected to be left unchanged at this meeting, all eyes will turn to the post-meeting press conference where Bernanke will unveil the Fed's latest economic projections — relevant for the timing of the first rate hike — and hopefully provide greater clarity on the likely time frame for tapering asset purchases.” On Tuesday the trend of positive equities continued and Hugh Johnson of Hugh Johnson Advisors believed that stocks were rallying “in anticipation that [U.S. Federal Reserve Chairman Ben] Bernanke is not going to taper soon. If he does what we think, the market is going to give up some ground, because what he is going to say is going to be fully priced into the market. When you anticipate good news, you buy stocks; when you finally get the good news, you sell.” Johnson was dead on because after the Fed announcement, the equities market headed lower around the world. Equity, bond and commodity markets sold off in Europe and Asia in overnight trading, taking up where the U.S. stock market left off. Japan’s Nikkei stock index fell 1.7 percent and all European markets traded at least 1 percent lower. Germany and France were hit the hardest; they are also the strongest European economies. Bank of Singapore chief economist Richard Jerram said on CNBC, “Markets are not trying to rationally judge what the real impact of a tapering of QE is likely to be.” The global fear of what will happen when the Fed begins to unwind the QE program played into Thursday’s reaction. U.S. stocks fell more than 2 percent by day’s end, major markets in Europe dropped more than 3 percent and Chinese markets dipped approximately 2 percent. Meanwhile, interest rates increased to their highest point in two years, and the U.S. dollar rose as well.
At 4:46 p.m. (EDT), the APMEX Precious Metals spot prices were:
- Gold, $1297.10, Up $8.90.
- Silver, $20.15, Up $0.21.
- Platinum, $1377.00, Up $11.20.
- Palladium, $676.50, Up $11.40.
For more APMEX reviews of daily and weekly Precious Metals market activities, visit our News and Commentaries page.
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