"Distorting" US Policy Goes On, But Gold Falls After Fed, Silver Drops $1

WHOLESALE prices of gold and silver extended yesterday's sharp falls in London trade Thursday morning, as world stockmarkets also fell following the US Federal Reserve's latest policy statement.

Changing neither the US Dollar's zero interest rate or $85 billion of monthly asset purchases, "Fiscal policy is restraining economic growth...Inflation has been running below the Committee's longer-run objective," the central bank said Wednesday.

Deciding "to await more evidence that progress will be sustained before adjusting the pace of purchases," the US central bank – which had flagged September as the likely start of 'QE tapering' in June – said again that "a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens."

By lunchtime in London today, gold stood almost 3% below Monday's 5-week highs, hitting the lowest price since last Tuesday at $1323 per ounce.

Silver briefly dipped below $22 per ounce after breaking above $23 on Wednesday for the first time in 6 weeks.

The rising Dollar knocked the Euro currency back to its lowest level in 2 weeks at $1.3625.

Crude oil led commodities lower with a 0.5% drop. US government bonds rose in price, nudging the 10-year yield back down to 2.50%.

"Clearly," says today's precious metals comment from German bank Commerzbank, "some market players expect the Federal Reserve to scale back its bond purchases in the near future.

"[But] the Fed made virtually no changes to its statement that would justify this expectation."

Looking ahead, "The Fed will likely not do anything at its year-end meeting given that there are key budget and debt ceiling dates just a few weeks after that," says Edward Meir at brokers INTL FCStone.

"We think gold may be under pressure for the balance of the week, but the [precious metals] complex should regroup and push higher going into year-end."

Meantime, says ANZ Bank's daily note, "Gold along with other markets, was positioned for a dovish Fed. With this event risk now behind us, the market will go back into data-watch mode."

Looking at gold market dynamics, "The slowing of physical demand and decline in Shanghai premiums will mean prices have to fall further," says ANZ, "before sparking any strong end-user demand."

Shanghai gold ended Thursday equal to $1337.29 – some $1.50 above London spot gold per ounce – after dropping Tuesday to a discount to the world's pricing benchmark for the first time in 2013.

Declining trade volumes on the Tokyo gold futures exchange saw foreign traders account for a record-large 42% of the market in September, the Tocom said last week.

Today the Bank of Japan stuck with its 0.1% interest rate and $700 billion per year of quantitative easing.

"The recovery and the economy are distorted," said a letter to clients this week from the $23 billion hedge fund Elliott Management.

That makes the situation "uniquely positive for gold," says the fund, run by prominent Republican backer Paul Singer, also saying Eurozone politicians have done nothing to fix the currency union's "unsustainable structure".

Studying charts of the gold price, "If a picture can tell a thousand words, this does it quite succinctly," says MacNeil Curry, head of global technical strategy at Bank of America Merrill Lynch, pointing to a monthly log chart of Dollar gold since 1980.

Curry's uptrend – which joins the rising price of gold's lows of the early 2000s – is extended to 2013, but comes beneath and does not touch the market price since 2005.

"There has been no damage to [gold's] long-term uptrend which began back at the turn of the century," says the BAML technician.

Shorter-term, "I would certainly look for a move upwards of at least $100 from current levels."

Latest data from US regulator the CFTC – now 2 weeks behind with its Commitment of Traders report after the US government shutdown ended – meantime show speculators in New York gold futures cutting their net betting on higher prices by 25% in the week-ending Tues 15 Oct.

Gold fell over 5% that week to hit a 3-month low of $1252 per ounce.

Adrian Ash

(c) BullionVault 2013

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