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(Kitco News) - The Federal Reserve kicks off its two-day monetary-policy meeting on Tuesday, but most market participants said they do not expect the Fed to embark on any new stimulus program.

Instead, they said, the Federal Open Market Committee may want to see more employment reports and other data before considering anything to stimulate the U.S. economy. That could cause gold prices to sell off as the yellow metal rose last week in hopes that another round of quantitative easing might be coming soon.

Gold prices gained last week following a report in the Wall Street Journal that said the Fed is frustrated at the pace that U.S. unemployment is falling and it may be considering options to address this issue. The market pulled back after Friday’s U.S. gross domestic product report data came in at a rise of 1.5%, slightly better than expected. Some market watchers suggested that news meant more stimulus from the Fed was not a foregone conclusion.

Analysts at BNP Paribas said the Fed “is expected to hold fire on announcing QE3 (a third round of quantitative easing), but rather tweak the statement to highlight their ongoing concerns and readiness to do more.”

Quantitative easing is a bond-buying program to lower long-term interest rates. The Fed has had two quantitative easing programs, with the last one initiated in the fourth quarter of 2010 to revive a sluggish economy.

Analysts at Brown Brothers Harriman said certain members of the Fed, including Chairman Ben Bernanke, “cannot be pleased with the recent data that suggests growth is not strong enough to bring down the unemployment rate.”

However, BBH also said it’s unlikely the Fed will act at the current meeting and will wait until the September meeting to do something. By waiting the Fed can look at the July and August employment reports and more economic data in general. Also, the Fed might have a better sense of what the Europeans will do. If the Europeans are perceived as getting a better handle on their situation, it may lessen the impact a weak eurozone has on the U.S. economy, BBH said.

On Friday, the July U.S. employment data is slated for release and it could affect markets because traders will likely put it in context of the Fed meeting.

GOLD NEEDS QE

Gold prices stopped short of taking out the recent high of $1,640 in its rally last week and Edel Tully, precious metals strategist at UBS, said quantitative easing is what it will take to push the momentum higher.

“It's clear to us that gold needs QE to emerge if the metal has any hopes of climbing above $1,700 this quarter. And while European woes are still very apparent, instead it is U.S. factors that will push gold higher. Ultimately gold needs the mood towards the U.S. to sour,” she said.

Tully said she doesn’t see any policy change to come out of this meeting, but if it did, that would act as the catalyst to push gold into a new trading range. On Tuesday, Tully lifted her one-month forecast for gold prices to $1,700 on the idea that the Fed will signal some sort of stimulus as soon as the Aug. 31 Fed confab in Jackson Hole, Wyo.

It was at the Jackson Hole meeting in 2010 that Bernanke signaled the second round of quantitative easing. That sign kicked off an asset-wide rally that lifted all financial markets.
James Steel, analyst, HSBC, said if the Fed postpones any policy action until September it could cause gold to weaken in a short-term move.

“If the market is disappointed at no further easing by the Fed at the next meeting we could see an abrupt but likely brief selloff. Any decline would be short-lived we believe, as investors may simply switch expectations for easing to later in the year, which likely help buoy gold prices. In the near term gold is more likely to track macroeconomic developments such as the FOMC meeting than physical indicators,” Steel said.

ECB MEETING ALSO IMPORTANT

The European Central Bank is meeting on Thursday and market watchers said ECB President Mario Draghi has set high expectations after his comments last week to defend the euro. Draghi has proposed actions such as further bond purchases, rate cuts, and a new Long-Term Refinancing Option, which allows the ECB to lend to eurozone banks at very low interest rates.

Several commentators said the markets might be setting themselves up for disappointment if action from the ECB is less than expected. That could pressure “risky” markets such as stocks and commodities. Gold rallied sharply last week on ideas monetary easing was coming from the ECB, so the market could retreat if participants deem the action insufficient.

Mike Dragosits, commodity strategist at TD Securities, said don’t be surprised if metals across the board sink after the two meetings.

“We believe that this week will be one of disappointment, leaving the metals complex vulnerable for a move to the downside; however, central bank balance sheet expansion is likely to come, and is one of the factors that drive our (fourth quarter) forecasts higher. But in the near-term, we see risky assets, like commodities, correlating with the headlines either supporting or denouncing further central bank stimulus,” he said.

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By Debbie Carlson of Kitco News dcarlson@kitco.com

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