Gold Reclaims $1,700 After FOMC Statement Signals Fed More Dovish Than Thought

Gold shot above $1,700 an ounce on a statement made by the FOMC that it expects to keep interest rates at "exceptionally low levels" until late 2014. This was gold's first time above $1,700 since December 12, 2011.

1/25/2012 @ 2:33PM
By Allen Sykora
Forbes

(Kitco News) – Gold rocketed above $1,700 an ounce Wednesday for the first time since mid-December when a statement from the Federal Open Market Committee suggested that policy-makers may be even more dovish than financial markets had expected.

Furthermore, gold generated upward technical momentum with a so-called “outside day” reversal higher on the charts and also by closing the pit session above a number of moving averages.

The FOMC indicated that it intends to keep interest rates at “exceptionally low levels” until late 2014, compared to guidance of mid-2013 previously. Additionally, the FOMC signaled that further accommodation would likely come from adjustments to the balance sheet, said Nomura Global Economics.

February gold futures, trading at $1,658 an ounce on the Comex division of the New York Mercantile Exchange just minutes before the FOMC statement, have since shot as high as $1,704.50. This was their first time above $1,700 since Dec. 12. As of 2:32 p.m. EST, the February contract was up $35.30, or 2.2% to $1,699.80. Other precious metals also rose, with March silver up $1.035, or 3.3%, to $33.01 an ounce. It hit a $33.32 high that was its most muscular level since Dec. 2.

Ahead of the meeting, a number of analysts said they envisioned a limited reaction by gold since the market has already factored in an expectation for low rates until mid-2014. But by pushing back their anticipated start of tightening to late 2014, policy-makers showed they are even more dovish than thought.

“We were all under the assumption that rates would be held at a low level until 2013, but now with the date extended to 2014, it’s inherently bullish for gold,” said Ralph Preston, senior market analyst with Heritage West Financial.

Low interest rates help gold in a number of ways. They tend to weaken the dollar, which in fact fell after the FOMC statement. This helps demand for all commodities priced in dollars since it makes them cheaper in other currencies, plus some investors buy gold as a hedge against a weaker dollar. Low rates also hold down the so-called “opportunity cost” of holding gold, which means they are not losing out on higher interest earnings by holding a non-rate-bearing asset. Low rates are also seen as inflationary.

Mike Daly, gold and silver specialist with PFGBEST, said some participants might have wondered if rate hikes could come sooner than previously thought since the U.S. economy has shown signs of improvement lately.

“The FOMC basically came out and said they’re going to keep the rates low,” Daly said. “And if you read between the lines a little bit, there is probably the possibility of some easing coming down the road to help jump-start things.”

With the federal-funds rate already essentially zero, market participants in particular have been wondering if the Fed might undertake a third round of quantitative easing, which is the buying of Treasury securities in a bid to push down long-term yields.

“Basically, I think the bulls are back in control,” Daly said.

The Fed statement said unemployment remains “elevated,” growth in business fixed investment has “slowed,” the housing sector remains “depressed” and inflation is “subdued.” And, officials said they expect to maintain a “highly accommodative” stance on monetary policy.

“It seems like if the situation is sluggish, maybe they’ll throw more money at it,” Daly said.

Nomura, in a research note, said the FOMC made a “notable shift” in emphasis in the language describing options for future policy changes.

“Previous statements said that the Committee was ‘prepared to employ its tools’ to promote stronger growth,” Nomura said. “In contrast, today’s statement dropped the reference to ‘tools’ and shifted focus to using the balance sheet to promote stronger growth.”

More specifically, Nomura cited this sentence from the FOMC statement: “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”

Technically, Preston said, the gold market needs a weekly close above $1,700.

“I’d like to see it close over $1,700 on Friday and then test that area next week,” Preston said. “It if can do that, then that’s really bullish for gold. Then $2,000 might be in the cards.

“What’s helped is that we’re coming off of three months of selling. All the weak hands are out of the market. This could be new, fresh hands establishing positions, using the Fed as a springboard for higher prices.”

Further, Daly said, traders who previously sold into the market are buying to cover their short positions.

Gold also generated technical momentum on a number of fronts, said Charles Nedoss, senior market strategist with Olympus Futures. “It’s all (because of) the Fed statement,” he said. “Technically, it’s a big ‘outside day’ through a bunch of major moving averages.”

The metal made an “outside day” higher by first trading down through the previous day’s low, then closing above the previous day’s high. This is normally seen as a bullish sign by chartists.

Furthermore, after a session low of $1,649.20 an ounce, February gold crossed above several moving averages. This includes the 10-day average around $1,659, the 50-day near $1,667 and the 150-day around $1,683. And whereas February gold at times has dipped back below the 100-day average of $1,697.20 in after-hours screen trading, it nevertheless closed the pit session above this with a settlement of $1,700.10 an ounce.

Gold often moves inversely to the dollar, and a technical chart shows the dollar index is “failing” after making an outside reversal lower, Nedoss said.

“Meanwhile, Preston said, if gold should fail at the $1,700 area, then “$1,650 has to hold” to retain a constructive technical picture. “A close under $1,640 encourages the bears. I’m bullish on gold unless it ends up closing under $1,620.”

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

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