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Metals Surge On Reassessment Of QE After Bernanke Comments

By Allen Sykora of Kitco News
Thursday July 11, 2013 10:47 PM

(Kitco News) - Metals are sharply higher across the board – led by copper and silver – as market participants re-evaluate whether the Federal Reserve will start taking away the proverbial “punch bowl” as quickly as once thought.

Gold and other metals fell sharply last month, while the dollar rose, when Federal Reserve Chairman Ben Bernanke, during a press conference after a meeting of the Federal Open Market Committee, outlined a scenario in which policymakers might start tapering asset purchases yet this year, provided that the economy continues improving.

Treasury yields surged. But in the days following, several Fed speakers seemingly hinted that markets took the comments too hawkishly. The Fed chief himself likewise took a more dovish stance late Wednesday in a speech before a conference sponsored by the National Bureau of Economic Research.

In particular, Bernanke said a "highly accommodative policy is needed
for the foreseeable future."

One trader characterized this line as the “phrase heard ‘round the world,” a take-off on the “shot heard ‘round the world” often used for several historical events, from the beginning of the U.S. Revolutionary War to the start of World War I to Bobby Thompson’s pennant-clinching home run in 1951.

Said another trader: “His comments yesterday lit a fire under all of the markets. He made it clear they’re going to keep pumping stuff into the system.”

Buy stops appeared to be triggered in a range of markets from gold to the euro, this trader said. These are pre-placed orders activated when certain chart points are hit.

Bernanke’s speech came just a few hours after minutes from the June FOMC meeting showed that roughly half of the Fed officials consulted would like to see more strengthening in the jobs market before starting to scale back bond purchases. The Fed has been buying $85 billion in Treasury and mortgage-backed securities monthly in a bid to push down long-term yields, known as quantitative easing.

Shortly after 10 a.m. EDT, August gold was $36.20, or 2.9%, higher to $1,283.60 an ounce on the Comex division of the New York Mercantile Exchange. September silver was up 88 cents, or 4.6%, to $20.045. Nymex October platinum rose $38.30, or 2.9%, to $1,406.40. September copper was up 9.55 cents, or 3.1%, to $3.1865 a pound.

On the London Metal Exchange, copper, aluminum, nickel, zinc, lead and tin were all higher by anywhere from 0.6% to 2.9%.

August gold peaked at $1,297.20 overnight, before backing off. At the high, the metal was up $117.80, or 10%, since the low of $1,179.40 back on June 28. On a spot-continuation chart, that had been the weakest level since 2010.

“One of the reasons gold saw such a dramatic sell-off (last month) … is the fear that the Fed was going to take the punch bowl away,” said Phil Flynn, senior market analyst with Price Futures Group.

But on Wednesday, Flynn said, the Fed chief essentially gave it back or at least let the markets know it would not be left empty.

“If you listen to his comments, it seemed like he was talking out of both sides of his mouth,” Flynn said. “It was rather confusing. But the statement the market seemed to latch onto was the talk that the Fed is going to stay very accommodative even if they hit some of the employment targets they have been looking for (such as a jobless rate of 6.5%). I think he is trying to suggest if they only buy a few less bonds, in the whole scheme of things, it’s not the same as trying to take away the punch bowl totally.

“He’s trying to send an assurance to the market that rates aren’t going to go up any time soon and tapering is not a foregone conclusion.”

Bernanke suggested the current jobless rate of 7.6% “if anything overstates the health of the labor market.” The yield on 10-year U.S. Treasury notes fell as far as 2.566% Thursday morning from a high of 2.691% Wednesday.

“The main take-away from both the June (FOMC) minutes and Bernanke’s comments seem to be that the Fed is perceived not to be coming across as hawkish as when Bernanke last addressed the media,” said Edward Meir, commodities consultant with INTL FCStone. “Despite this, we suspect that when the time comes in September, the Fed will indeed start to remove portions of its $85 billion/month purchase program, especially if the economy maintains its current growth trajectory. However, investors are not discounting such a scenario just yet, preferring to focus on the probability that the Fed will keep its program in place for far longer.”

Bernanke’s comments “offered precious metal traders hope that the Fed will help U.S. economic growth and, in turn, inflation,” said Rob Kurzatkowski, senior commodity analyst with optionsXpress.

On top of all this, expectations that quantitative easing may last longer than thought were further encouraged by a soft reading on U.S. jobless claims Thursday morning, said George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures. Weekly first-time claims jumped 16,000 to 360,000, the highest level in two months.

Further support for metals – in particular the base complex – came after the Chinese stock market soared, in part due to hopes that authorities will undertake some type of action to improve the economy, said Flynn and Meir. Premier Li Keqiang this week emphasized the importance of the economy maintaining a reasonable rate of growth.

Meanwhile, platinum and palladium also continue to be underpinned by worries about labor-related supply disruptions in South Africa, Flynn added. Earlier this week, workers staged a one-day strike against the world’s largest platinum producer, Anglo American Platinum. “The threat is that these strikes could re-emerge because the tensions have been very high,” Flynn said.

By Allen Sykora of Kitco News asykora@kitco.com

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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