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Precious Metals Fall After FOMC Minutes Dampen QE3 Expectations

Friday April 13, 2012 10:08

Last week, the U.S. Federal Reserve Bank’s FOMC or Federal Open Market Committee released the minutes for its latest monetary policy meeting held on March 13th. The markets’ response to the more hawkish than expected minutes resulted in a notable rally in the U.S. Dollar at the expense of the precious metals and U.S. stocks.

In the minutes, which are kept by Secretary William English, the FOMC telegraphed a rosier picture of the U.S. economy and notably failed to indicate that it was considering additional quantitative easing measures.

This key omission further dashed already receding hopes among many financial markets participants that the Fed would be printing more money later this year, which could spark an increase in inflationary pressures.

Furthermore, on the subject of inflation, the FOMC minutes noted that, “Overall consumer price inflation was relatively subdued in recent months. More recently, prices of crude oil and gasoline increased substantially. Measures of long-run inflation expectations remained stable.”

Precious Metal Prices React Negatively to the FOMC Meeting Minutes

Silver and gold prices were well coordinated with the FOMC’s Meeting Minutes and fell swiftly, interpreted by the mainstream as due to the lack of any mention of further quantitative easing measures.

In particular, the price of spot silver declined sharply from its open of $32.62 before finding support at the $30.99 level after the release of the FOMC Meeting Minutes and then closing off its lows at $31.37. 

Spot gold suffered its second substantial down day, falling from an open of $1645.95 to a low of $1612.10 before bouncing somewhat to close the day at $1620.45.

FOMC Maintains Current Policy but Vote Not Unanimous on Keeping Rates Low Until 2014

The minutes showed that the Fed’s monetary policymakers were unanimous in deciding to maintain the central bank’s benchmark Fed Funds Rate below the historically low 0.25% level once again. 

Nevertheless, the minutes reported a single dissenting vote was cast by Richmond Fed President Jeffrey M. Lacker who objected to the wording in the FOMC’s Rate Statement that, “economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” 

According to the minutes, Lacker expressed the view that, “with inflation close to the Committee's objective of 2 percent, the economy expanding at a moderate pace, and downside risks somewhat diminished, the federal funds rate will most likely need to rise considerably sooner to prevent the emergence of inflationary pressures.”

Once again, from the hallowed halls of academia and management of perception, we are subjected to the idea that interest rates will rise in any meaningful way as long as unemployment, housing, and real economic growth remain stalled.

It is astonishing that so many continue to believe that the FED could ever raise rates again without crushing any hopes of a real estate recovery or for that matter without a bond market debacle.

The FOMC’s next meeting will be held on Tuesday April 24th and Wednesday April 25th, and the outcome will be closely scrutinized for further developments regarding any future quantitative easing programs.

By Dr. Jeff Lewis,
Editor, Silver-Coin-Investor.com
April 4th, 2012

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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