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Gold price zeroes in on Fed's last meeting of the year

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(Kitco News) The precious metal is lacking momentum at the start of the week. However, investor interest might still return to gold as markets focus on the last Federal Reserve meeting of the year, according to analysts.

Aside from ongoing fiscal stimulus negotiations, all eyes are on Wednesday's Fed announcement along with the Chair Jerome Powell's press conference.

Markets might see an introduction of new forward guidance language at the December meeting, TD Securities strategists said.

"New forward guidance language at next week's meeting was suggested by the words' fairly soon' in the following section of the minutes to the November meeting," the strategists said. "The outcome-based guidance will be somewhat vague in that it will be 'qualitative,' not quantitative. That likely means broad references to the employment and inflation goals rather than specific readings that would trigger changes, but the relative dovishness of the guidance will depend on the wording used."

The December statement might clarify that the QE program will run until there is a certainty of progress when it comes to the maximum employment and 2% inflation goals.

"We expect officials will also announce a lengthening of the weighted average maturity (WAM) of Treasury purchases, although that change could also be delayed until a later meeting … They will probably also note near-term challenges and uncertainties associated with the pandemic, even as news on vaccines has been encouraging for the medium/longer-term outlook. The median funds rate projection will almost certainly continue to show no tightening through the end of 2023," TD Securities strategists wrote.

For gold, this is all good news, as the stimulus, lower yields, and weaker U.S. dollar are likely to trigger more allocation towards the precious metal.

"The Fed will lean against the recent steepening by linking QE to economic outcomes and extending the weighted-average maturity of its Treasury purchases. The dovish outcome we expect should reinvigorate speculative interest in gold, which has suffered from massive ETF outflows over the last six weeks," TD Securities said.

The tone of the Fed's statement is forecasted to remain the same with some possible tweaks, StoneX market analysis head for EMEA and Asia regions Rhona O'Connell wrote on Monday.

"The general consensus is that there would only be tweaks at the most, possibly revolving around extending the financial asset purchase programme," O'Connell said.

During the press conference, Powell is projected to stress downside risks facing the U.S. economy in the winter months, said BBH head of currency strategy Win Thin.

"The U.S. outlook has worsened since the November FOMC meeting. Infection numbers are making new highs with no sign of abating … The full recovery will be pushed out further into next year with the likelihood of tighter restrictions ahead," the head of currency strategy said. "As Fed Chair Powell has said countless times, there can be no sustainable economic recovery until the virus is under control."

BBH also summarized some of the tools still at the central bank's disposal, specifying when, if at all, the Fed could implement them:

"Tweak existing loan and liquidity programs – possible at any time. Tweak its macro forecasts – possible now, possible in 2021. Tweak its forward guidance – unlikely now, likely in 2021. Adjust asset purchases – unlikely now, possible in 2021 if aggressive fiscal stimulus passed. Introduce Yield Curve Control – very unlikely now, possible in 2021 and beyond if long rates rise too much. Negative interest rates – very unlikely," BBH said.

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