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Gold Looks to Fed Reserve Meeting Minutes to Guide Price Action

Gold Looks to Fed Reserve Meeting Minutes to Guide Price Action

2011-10-08 00:09:00
Ilya Spivak, Sr. Currency Strategist
Share:
Gold_Looks_to_Fed_Reserve_Meeting_Minutets_to_Guide_Price_Action_body_Picture_5.png, Gold Looks to Fed Reserve Meeting Minutes to Guide Price Action

Fundamental Forecast for Gold: Neutral

The outlook for US monetary policy remains the central issue for gold prices, putting the spotlight on the release of minutes from September’s fateful Federal Reserve monetary policy announcement in the week ahead. Last month’s FOMC meeting unveiled the so-called “Operation Twist”, a reshuffling of securities on the central bank’s balance sheet with the goal of bringing down long-term borrowing costs, in lieu of another expansion of outright asset purchases (dubbed “QE3”) that many had hoped for.

The outcome proved to weigh heavily on gold prices, undermining the metal’s appeal as an alternative store of value. Indeed, gold has proven as resilient as it has been in the aftermath of the 2008 global recession in large part because traders sought the metal as a hedge against runaway inflation in the event that central banks are unable to unwind their aggressive stimulus efforts as growth picked up. In this context, the Fed’s decision not to embark on further dilution of the money supply weighed on demand for the yellow metal.

Naturally, this means traders will be keenly interested to parse the minutes from September’s meeting to gain insight into the Fed’s thinking, trying to figure out if another round of QE is something still entertained as a viable near-term policy alternative or if it has been largely abandoned for the foreseeable future. Last week’s congressional testimony from Fed Chairman Ben Bernanke suggests the latter scenario, but any insights into just how close the central bank came to opting for QE3 and what triggers could be set off to warrant it ought to prove telling nonetheless.

Otherwise, gold continues to feel an indirect influence from risk sentiment trends via the price action in the US Dollar. Needless to say, the metal is priced in terms of the US currency, which now stands as the go-to safe haven asset for jittery investors as the third-quarter corporate earnings reporting season gets underway. If companies’ performance begins to fall in line with the malaise apparent on leading global economic indicators, a broad-based decline in share prices would encourage the greenback higher and weigh on gold by extension. Alternatively, signs of resilience on the earnings front can be expected to have the opposite effect.

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