The Daily Nugget: Gold Unimpressed By Fed

Gold below $1,700? But the Fed just doubled QE, isn’t gold supposed to go up?

Not anymore, as I wrote in our on Tuesday -- gold almost appears bored by the Fed. Expectations of the Fed’s money printing schemes had already been taken into account by markets, and of course concerns that this round of QE could be ‘limited’ (inflation) are making investors cautious. It seems markets wanted unlimited QE as we saw announced previously.

We are, obviously, also coming to year end. Many are looking to liquidate and square up their positions before the Christmas break. All of these factors are clearly short-term. In the long-term these moves by the Fed are clearly good news for gold. Physical gold investment demand appears to be holding steady, however the price cannot hold against those investors looking to sell and quickly book profits.

As we said above the Fed have linked this round of money printing to employment, saying these rates will remain low until unemployment is back below 6.5%, which they do not see happening until 2015.

Following the announcement gold reached a two week high of $1,723.01 an ounce before dropping to $1,693.80. Analysts believe the yellow metal will remain a narrow range until the end of the year (assuming we don’t see similar trading action we did around last Christmas) given the time of year and U.S. budget talks causing many to be cautious and look for liquidity.

The Fed’s statement that it is prepared to risk higher inflation in order to sort out those pesky unemployment figures suggests targets could be moved to anywhere they fancy, if not 3% why not 3% or 5%? Whilst this would be bullish for gold we must also remember that for as long as QE remains in play and maintains low interest rates, this will supress rates across the yield curve meaning zero-yielding gold will look more attractive to investors.

Silver fared slightly worse, falling by more than 2%. Unlike gold, it is down on the year.

Yesterday really did separate the men from the boys -- those who see gold as a hedge against Fed announcements and those who invest in gold bullion for the long-term, regardless of announcements and other chatter. However yesterday’s markets understood the implications and results of QE -- the fact remains that central banks cannot permanently shield society from the effects of over-spending and living out of their means.

Perhaps those selling gold yesterday were only reading the seven reports mentioned in this Reuters article. Clyde Russell has studied 7 reports ‘which included among others articles from Goldman Sachs, Morgan Stanley, Deutsche Bank, Barclays and ANZ Banking Group, five didn’t contain the words China and India.’ If people writing, and reading, these reports are not aware of the driving force these two nations have on the gold market then no wonder they are looking to sell gold.

According to Russell the reports focussed heavily on QE and the potential for more in the coming year. They are ignoring the major role central bank buying has played on the market and the increase in ETF holdings this year.

Yesterday, soon-to-be Governor of the Bank of England Mark Carney suggested central banks turn away from the rule-book and try some new tactics on getting us out of this slump. Whilst he insists he was speaking only with Canada in mind, his calls for abandoning inflation targets will set some minds going here in the UK.

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