| 25 April 2012-FOMC Expected To Keep All Options On Table; Gold Market To Scrutinize Statements For Policy Clues |
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FOMC Expected To Keep All Options On Table; Gold Market To Scrutinize Statements For Policy Clues by Allen Sykora Of Kitco News from http://www.kitco.com/ The Federal Open Market Committee will avoid tipping its hand on future U.S. monetary policy when officials wrap up a two-day meeting Wednesday, trying to stay as neutral as possible to instead react to future economic data, market analysts said. The U.S. economy has improved so far this year, perhaps removing the need for the Fed to undertake further accommodation, the analysts said. But the counter argument is that most March data was disappointing, meaning the Fed presumably will not want to rule out further easing measures, thereby leaving all of its tools on the workbench. Whatever the Fed decides, gold traders will be paying close attention. Gold has made large moves on other speaking appearances by Federal Reserve Chairman Ben Bernanke in recent months, “so this will be a crucial event to watch,” said Alex Thorndike, senior trader for precious metals and foreign exchange with MKS Capital. UBS precious-metals strategist Edel Tully said: “Fed-speak still remains the largest determinant of gold's direction for now.” Gold surged early in the year due to a number of factors, one of which were ideas that the U.S. central bank would undertake a third round of bond purchases to push down long-term yields, referred to as quantitative easing. But gold has had several sharp declines since tied to perceptions about the Fed, starting with Feb. 29 when Bernanke appeared before a congressional committee. His remarks that day were seemingly innocuous and it was what he didn’t say that spooked the gold market—he did not make any reference to further QE, disappointing gold bulls at the time. Another big decline came the last time the FOMC met on March 13, when a post-meeting statement said the Fed expected “moderate” growth over the coming quarters and anticipated the unemployment rate would decline gradually. This was further construed to mean less chances of QE3. But then came some softer data, including the March employment report. Non-farm payrolls grew by 120,000, which was the first time the economy generated fewer than 200,000 jobs since November. Also, the most recent weekly report on U.S. initial jobless claims showed the four-week moving average had increased to 374,750, the most since late January, and home-sales data has been soft. Loose monetary policy helps gold several ways, and vice-versa. Accommodative policy leads to inflation concerns; lowers the so-called “opportunity cost” of holding gold, or the earnings lost by holding gold instead of assets providing a yield; and weakens the U.S. dollar, leading to buying of gold as a currency hedge. “Gold continues to take its cue from the likelihood of further
quantitative easing, with markets focused on this week’s FOMC meeting,”
said a daily research note from Barclays Capital. “While hints of
additional measures could boost prices, equally if hopes are quashed
further, gold will be back searching for its physical floor. Our
economists’ base case does not suggest a need for further easing unless
economic conditions worsen.” And, he says, “we suspect that things will not be much different this time around, particularly if the Fed acknowledges that the U.S. economy may be showing signs of ‘topping out.’ This could revive sentiment that some sort of QE option is back on the table, resulting in a short-lived bounce in most markets.” Source: http://www.kitco.com/ |
