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UPDATE: Fed Leaves QE Unchanged At $85 Billion Monthly; Gold Rallies Sharply

By Debbie Carlson and Allen Sykora of Kitco News
Wednesday September 18, 2013 4:10 PM

(Updating story with more details, additional comments from analysts)

(Kitco News) - Gold prices rallied immediately after the Federal Open Market Committee announced Wednesday that it would leave its monthly bond purchases unchanged at $85 billion a month, in a decision that surprised the market.

Other metals also surged.

Just after 4 p.m. EDT, December gold futures were up $55.40 an ounce at $1,364.80 on the Comex division of the New York Mercantile Exchange. December silver was up $1.331 at $23.115. Nymex October platinum rose $40.70 to $1,463.10, while December palladium gained $10.70 to $717.65. Comex December copper rose 9.25 cents to $3.3155 a pound.

Five minutes ahead of the Fed announcement, December gold futures were trading at $1,313.50, December silver was at $21.695. October platinum was at $1,433, while December palladium was at $704.65 and December copper was at $3.2835 a pound.

Market participants widely expected that the Fed would announced a cut to its bond-buying program, known as quantitative easing, ever since Chairman Ben Bernanke said in May that the Fed was preparing to taper its asset purchases as economic conditions warranted. So when the Fed said it put off tapering until later in the year, it came as a surprise.

Gold prices rallied sharply, as did the stock market.

“If you didn’t believe the Fed was going to taper, people acted like you didn’t belong in this business,” said Sterling Smith, futures specialist, commodity research, Citibank Institutional Client Group.

The FOMC said it left alone its asset purchases because it wants to see more signs that economic improvement “will be sustained” before tapering.

Gold futures prices are down roughly 20% on the year. Several gold market watchers said recent weakness in the yellow metal comes from the Fed’s plan to shift away from its ultra-loose monetary policy. Several banks have lowered their longer-term price forecasts because of the expected beginning of the end of QE.

The market’s solid rally to the $1,340s area was a knee-jerk reaction to the Fed news, Smith said.

The Fed’s decision to stand pat on tapering makes sense. “The Fed obviously doesn’t think the economy is particularly healthy and it’s not when you see a record number of people on food stamps,” Smith said.

Gold now has a chance to target $1,400 an ounce, Smith said, as he doesn’t think there will be any chance of tapering in 2013. He said the economic data is unlikely to change that much and given that there’s a new Fed chairman slated to take over next year, Bernanke is likely to let that person make the decision.

Phil Flynn, senior market analyst with Price Futures Group, said the Fed decision likely will help put a “floor” under gold and enable the market to work its way back above the $1,420-an-ounce area from last month.

“The Fed printed a floor in gold today, using the term loosely. Essentially, with the majority of analysts expecting the Fed to taper back on bond purchasing – and not doing that – it really did a head fake to the gold trade,” Flynn said.

Previously, he said, traders had sold gold heavily in anticipation of a tapering announcement on Wednesday. The December futures hit their high for the summer of $1,434 on Aug. 28, then fell all the way back to $1,291.50 overnight in the countdown to the FOMC meeting.

“Now that tapering is off the table, even if the Fed comes back and tells us they’re going to taper next month, the market is going to have a hard time believing it – unless they come out clearly,” Flynn said.

“I think there has been a little damage to the Fed’s credibility. But if you’re a metal buyer, this is very, very bullish,” he said, later adding, “At least for the near term, the Fed really cemented a bottom just below $1,300.”

Fed Lowers Jobless Rate Threshold; Lowers Economic Growth Outlook

The Fed said it will keep buying bonds as long as the unemployment rate remains above 6.5% and inflation between one and two years ahead is projected to be no more than a half percentage point above the Fed’s 2% longer-term goal. In August, the Department of Labor said the U.S. unemployment rate is 7.3% and inflation has run well below 2%. Previously, the Fed had signaled a 7% jobless rate for a sign to start the end of stimulus.

The Fed may not taper until the unemployment rate is “well below” 6.5%, Bernanke said, and suggested rates may remain low, even if the jobless is rate is down if inflation is also subdued.

The Fed cut its U.S. growth forecast for the third time this year, saying the economy will grow between 2% and 2.3% in 2013, down from 2.3% to 2.8%. It predicted an inflation rate no higher than 1.2% in 2013. The bank is unlikely to raise the short-term fed funds interest rates until 2015.

Sean Lusk, director commercial hedging division, Walsh Trading, said considering how bearish sentiment became in gold, it is likely much of the gains seen in Wednesday’s trade was short covering, which is buying back of previously sold positions.

In the short term, Lusk said December gold could target $1,367 and then if it can break above $1,400, gold could rise to $1,426. “I imagine as the news cycle continues overnight you’re going to see some follow-through buying,” Lusk said.

The U.S. dollar was hit by the Fed’s decision, which also supports gold, Lusk said.

Both Lusk and Spencer Patton, founder and chief investment officer of Steel Vine Investments, said markets like crude oil and the stock market will benefit from the Fed’s decision.

“I’m afraid that the Fed has engineered something that it can’t get out of, which is endless money printing. There’s going to be major ramifications down the road. Markets that benefit from higher inflation will do well,” Patton said.

Bernanke again said Wednesday that the lack of fiscal policy out of Congress to help pull the U.S. out of its economic torpor is problematic. Both Lusk and Patton said considering that both a U.S. government shutdown and a fight over the debt ceiling is looming, the Fed might have felt the need to put off tapering right now.

“We’re staring at a government shutdown. Both the President and Congress are adamant on letting it happen,” Patton said. “I’m sure the Fed didn’t want to start tapering while that was going on.”

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By Debbie Carlson and Allen Sykora of Kitco News; dcarlson@kitco.com, 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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