Will The U. S Fed Remain Dovish?

Yesterday was a fairly quiet day for gold as a lack of US economic data failed to excite the markets, who were still trying to digest the news that spending cuts were likely to be put through, yet Democrats and Republicans remain divided over the issue.

This potential reduction in government spending appears to have relaxed inflation concerns, however in the medium to long term expect further easing as a result of the Fed working to boost the economy following the major job losses from the government cuts.

Gold was relatively unchanged yesterday as a strong dollar index, pitted against bargain hunting, placed both pressure and support on the gold price. Expect some further upward momentum in the US Dollar index which will put pressure on gold.

Much commentary at present appears to focus on the outflows from gold-backed ETF s during the month of February. However, very little attention is paid to the record amounts of physical gold and silver which is being purchased – such as the year on year increase of gold and silver American Eagle coins in February.

Gold found support yesterday after Janet Yellen, a Vice Chairperson of the U.S. Fed, said in a speech, that we shouldn’t fear a QE3 slowdown. Her comments come after last month’s fears that the Fed was looking slightly hawkish. However, given Bernanke’s comments last week, and now Yellen’s, it looks like the FOMC are continuing to head in a dovish direction – all good news for gold. Today Fed Governor Powell is due to speak at a banking seminar.

Elsewhere, Japan’s new central bank governor Haruhiko Kuroda, pledged to do whatever it takes to end 15 years of deflation. It’s clear the easy monetary policies, which drove gold 7% higher last year, are here to stay.

Societe Generale said yesterday that they expect to see appetite for silver investment increase at both the institutional and retail level. Despite gold’s recent poor price performance, investors it appears are still looking for a cheaper substitute for gold, which gives them precious metals exposure.

Silver Eagle investment is not only impressive in the US, but Europe too – something which has lead the bank to conclude that silver demand will outstrip that for gold this year. Silver investment into ETPs is also something which is impressive – with daily average investment of $15.7 million representing an increase of 32% on last year.

This week we also expect to see improved performance for both platinum and palladium. Last week prices were affected over South African supply concerns, which overshadowed improved data from the auto-sector. Car sales were up 4%, whilst China has announced new emission standards – something which will provide support to the metals, particularly palladium. Palladium is the most sensitive of the two metals given how it reacts to demand in both China and the US. The two countries favour gasoline powered cars, which use palladium in converters. Platinum however is more popular in the EU, where diesel cars are more commonly used. Both are, however, expected to stabilise over the course of this coming month.