Is Gold Bored With The Fed?

Monday gold appeared to be making a break for it, looking as though it may push through $1,718 but it was not meant to be. Instead, profits were booked as the metal made new highs, sending the price down for the first time in four days, silver followed suit and fell to $33.075.

Monday gold reached $1,717.36, its highest since last Monday. The climb was thanks to speculation that the FOMC would boost easing – replacing Operation Twist with a program which matches its ‘size and pace’ but Treasury purchases will be spread across the yield curve, the Fed will also continue with monthly purchases of $40bn of mortgage backed securities.

Whilst Operation Twist aimed to ‘sterilize’ purchases made (it simultaneously bought and sold bonds) its replacement is expected to be different and highly inflationary. Bart Melek, vice president and director head of commodity strategy, rates and foreign exchange research at TD Securities, says “What they’re doing is they’re printing, then they’re buying…. They’re building reserves,” he said.

So, whilst Goldman Sachs is desperately trying to dissuade us from considering gold investment given their optimism over the US’ recovery, it seems that the future won’t look so rosy. Operation Twists’ replacement appears inflationary; the larger the reserves become, the more difficult inflation will be to rein in, something which those who are looking to buy gold bullion should take note of.

Goldman Sachs’ feelings that gold is almost unreceptive now to an FOMC announcement is a valid point; Reactions since September have been fairly passive. Gold has posted losses for both October and November, despite dragging US budget talks or a weakening dollar. Direct Fed actions seem to be hardly grabbing gold’s interest anymore; however the impact of these announcements is yet to come. Rising inflation or perhaps an unexpected political event will most likely be the next thing to cause excitement in the gold price. We also must not forget the euro, which is far from being resolved.

Western economies have relentlessly tried ways to ease their economies somewhat, but all to no--or little--avail. For instance, the US has seen $16 trillion pumped into it, to produce a runt of a recovery. As we pointed out a couple of weeks ago, major currencies have experienced huge devaluations in the last 12 years.

Outgoing Bank of England Governor Mervyn King, raised his concerns Monday that countries would begin to actively manage exchange rates, rather than use domestic monetary policy, in order to revive their economies. This sounds rather hypocritical coming from the man who, during his time at the bank, has seen the British pound decrease in value by over 85%. Currency manipulation is, after all, a polite way of saying, currency devaluation.

ZEW economic sentiment indicators were released yesterday, for both Germany and the EU. Both are significantly higher than expected, with both producing optimistic readings…I want whatever they’re having.