The Gold Bears Went Ahead of Themselves - the Fed Stayed Put

The U.S. Fed delivered a surprise gift to the markets by staying put on its QE bond purchases. The daily settlement time for the U.S. Comex gold futures ended before the Fed announcements on Wednesday, and so the gold futures jumped 4.73 percent on Thursday to $1,369.50 while the spot gold price jumped 4.06 percent on Wednesday and 0.18 percent on Thursday. The S&P 500 Index surged 1.22 percent on Wednesday but retreated 0.18 percent on Thursday while the Euro Stoxx 50 Index rose 1.57 percent. The CRB Commodity Index also rose 1.32 percent in the past two days. The Dollar Index was beaten down by 1.12 percent on Wednesday and recovered 0.17 percent on Thursday to 80.372. Emerging countries’ stocks have surged the most since mid-July, with the Turkey stock market rising over eight percent in U.S. Dollar terms on Thursday. The U.S. 10-year government bond yield plunged 16bp to 2.6878 percent after the Fed’s press conference but climbed to 2.7519 percent on Thursday.

What Does a Delayed Taper Mean for the Markets?
The FOMC Committee decided to wait until they see increasing growth, continuous gains in the overall labour market and rising inflation before changing the size of the QE purchases. Bernanke emphasized that there are no pre-fixed paths of tapering. Essentially, he was concerned that the rising bond yields have tightened the financial conditions too much. The Fed has also revised down the 2013’s and 2014’s GDP but has raised the 2015 growth rate. The 2016 real GDP will be 2.5 to 3.3 percent. The Q4 average unemployment rate will be 7.1 to 7.3 percent in 2013, 6.4 to 6.8 percent in 2014, 5.9 to 6.2 percent in 2015, and 5.4 to 5.9 percent in 2016. The Fed expects the median Fed Funds rate to be two percent at the end of 2016, indicating that liquidity will only be tightened over a much longer horizon. Riskier markets especially the emerging countries’ stocks and currencies will benefit the most from a lower bond yield and a dovish Fed. Sentiments towards the precious metals immediately improve as the U.S. dollar plunges and the inflation expectation rises as measured by the TIPs while the renewed focus on the U.S. budget talk will support gold prices.

Better Gold Sentiments
According to Bloomberg, the gold analysts have turned the most bullish in three weeks. The continuous Fed pumping can bring liquidity back to the stock markets, especially in the developing countries, and the gold market, which has dropped 22 percent this year before the Fed’s announcement on Wednesday. The gold-backed ETP holdings fell to a three-year low according to Bloomberg, with investors selling 694.8 metric tons in 2013. More gold futures and gold stocks short-covering are expected as the taper decision can be pushed back to the December’s FOMC at the earliest.

What to Watch
This Sunday, we will monitor the Germany Federal Elections. We will also watch the September “flash” PMI from China, the E17, and the U.S. on 23 September, the September Germany business climate index and the U.S. August new home sales on 25 September, the August Japan CPI on 26 September as well as the speeches by five FOMC voters on 27 September.

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20 Sep 2013

About the author

Austin Kiddle

Austin has been working in the precious metals market for the last 12 years and is a Director of Sharps Pixley.

Austin wears a number of hats and can often be found writing thoughtful and occasionally provocative pieces about the bullion markets.

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