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Updated: Gold Prices Slip Following FOMC Meeting

By Debbie Carlson of Kitco News
Wednesday September 17, 2014 2:38 PM

Editor's Note: The article was updated with new information throughout.

(Kitco News) - The Federal Reserve remains on the path of normalizing monetary policy and that will weigh on gold and the commodity complex as a whole, analysts said Wednesday.

Gold prices slipped on the news that the Federal Reserve is taking a “go-slow” approach to changes in monetary policy and continued to creep lower following comments from Chair Janet Yellen after the Federal Open Market Committee meeting ended.

At 4:15 p.m. EDT, most-active Comex gold for December delivery was down $12.40 to $1,224.30 an ounce. The market fell as far as $1,222, its lowest level since early January.

Wednesday the FOMC reduced its bond-buying program by another $10 billion as expected, with the asset-purchase program expected to wrap up in October.

The Fed kept the phrase “considerable time” in its monetary policy about keeping short term interest rates near zero after it ends its asset-purchase program, known as quantitative easing.

Market expectations going into the meeting were that the Fed would alter the language and take out the phrase. However, comments Tuesday by Wall Street Journal Fed reporter Jon Hilsenrath suggesting the Fed may keep the phrase, but qualify it, gave market participants alternative ideas Tuesday of what would happen.

“We spent a considerable time debating the phrase ‘considerable time’ and it was all for naught,” quipped Ken Morrison, editor and founder of online newsletter, Morrison on the Markets.

The Fed also said “economic activity is expanding at a moderate pace,” but it remains concerned about “significant underutilization of labor resources.”

Additionally, the Fed said there is “sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions” which allowed it to cut the QE program by another $10 billion. 

“The Fed appears to be near the end of the asset-buying program,” said Phillip Streible senior market strategist, RJO Futures. “So it seems that QE has fully run its course. Inflation expectations are picking up just a little bit. We have everything in the making of a rising interest rate environment. That’s definitely going to weigh on gold. Gold prices are under pressure… You’re going to see this trend continue.”

Gold prices have been in a downtrend since July, with the weakness picking up steam in September on ideas the U.S. economy is growing strong enough for the Fed to move away from its extraordinary monetary policy. Yields on U.S. Treasury debt rose in anticipation the Fed may have its first rate hike in mid-2015 and the U.S. dollar rallied sharply. A stronger greenback can be negative for gold as the yellow metal is denominated in dollars, while rising interest rates raise the opportunity cost for holding gold since gold has no yield.

Dave Meger, director of metals trading at Vision Financial Markets, said the gold market is preparing itself for an eventual normalization of monetary policy.

“You saw the initial knee-jerk reaction where gold rose $4-$5 when the statement came out. That was likely in response to keeping the ‘considerable time’ (language) because so much of it was made prior to the announcement.

“But the market quickly refocused itself on the idea that at this point everybody is speaking to the eventuality of a rate hike in 2015. The pressure of that is what has been affecting gold over the course of the last several weeks. Even though you might have tweaked the timing of that, either to or fro, in listening to Janet Yellen speak, it didn’t change the inevitability that rates are going to be on the rise in the near-term future, and the weight of that is assessed in the gold market,” Meger said.

The U.S. dollar index took out its high from last week while Yellen spoke, rising to 84.805, its highest level since July 2013.

“As Yellen began to speak, we saw the dollar began to rally under that same inevitability of an interest rate rise, particularly when you see the rest of the world in stimulus mode and the U.S. being the only one with a slight economic recovery - define it as you may - at least an economic recovery versus the rest of the world, including China - as seen last night - creating a very large divergence between foreign currencies and the dollar. That dollar strength is one more significant weight really to the commodity complex as a whole,” Meger said.

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Kevin Grady, owner, Phoenix Futures and Options, said there were “a lot of nervous shorts” in the gold market prior to the FOMC meeting.

That can be seen in the weekly commitment of traders report from the Commodity Futures Trading Commission, which shows speculative traders have the smallest net-long position since June 17.

With the Fed reiterating some optimism on the economy, Grady said the short position holders are likely to hold on those positions for a while longer.

Conversely, if gold prices can rally, Grady said there are some resting buy stops between $1,245-$1,251, which, if triggered, could mean further upside for gold. A stop is a pre-placed market order which is activated if certain price levels are hit.

Streible said gold prices might be headed for a test of $1,200, with sell stops likely resting there.

“I’m fully convinced we’re going there. At that point, you’re going to see that same theme that we saw before, where some of your miners are going to start talking, threatening to close the door. We’ll probably get some bounces, come back up to this level and then I think we roll back on down,” he said.

Morrison said markets may also be bracing for Thursday’s vote on the Scottish independent referendum. Polling ahead of the vote is close, with undecided voters likely to make the difference.

“I think the currency markets are watching that. It has the potential to move markets much more than this FOMC statement,” Morrison said.

Streible said “gold has been a terrible market” for several months.

“I would have thought with five different wars going on, that investors would have taken some safety in gold, but they haven’t. The U.S. seems so isolated in everything, even though we’re getting involved, they’re really being cautious about it, using no soldiers, using drones. The geopolitical risk is not heightened. Now if ISIS (Islamic State in Syria) really does what they’re saying, make some attack on U.S. soil, then that’s a game changer,” he said.


By Debbie Carlson of Kitco News; dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco



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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