Daily Nugget – gold gets shaky ahead of FOMC
Overnight the spot gold price retreated to below $1300/oz, its lowest in almost six weeks, as concerns over tapering affected the yellow metal. This morning it is hovering just above this market with little expectation of climbing much further.
The gold price’s fall was just 1%, smaller than both silver and palladium which both dropped around 1.6%. Silver prices reversed gains seen earlier in the day.
Whilst tapering appears to be widely expected by various analysts surveyed in the mainstream financial media, few expect the amount that QE will be reduced by to be significant. For instance a Bloomberg survey of 64 individuals found a median expectation that Treasury purchases will be reduced by just $5billion, from the current £85 billion overall QE policy. General consensus appears to be $10 billion.
Today is a key day which has been being anticipated since Q1 this year. If nothing is announced today then it is unlikely tapering will go ahead at all before Bernanke’s January departure. However, the prospect of possible tapering has left many traders and investors anxious.
Tapering has clearly been priced into the gold price ahead of tonight’s statement. Whilst many who wish to hold physical gold bullion appear unfazed by the tapering issue (see research) more speculative investors are not looking to hold gold ahead of this evening’s announcement.
The language used in today’s FOMC statement will be key for markets and investors. Bernanke will give a press conference following the announcement, also look out for the updated FOMC forecasts of the US’ economic conditions.
Hints as to their expectations on the economy’s recovery, to their commitment to low interest rates and, of course, what type of tapering they pursue. For instance, Nomura analysts expect the Fed to cut Treasury bond purchases rather than the amount of mortgage-backed securities.
Inflation, a key indicator for the FOMC when deciding upon monetary easing, is not expected to increase, according to Andrew Grantham at DIBC World Markets. This is unsurprising given both energy costs and volatile food prices are not included in the calculations. The lack of (expected and official) inflation over the coming months may well affect the amount of tapering that goes ahead.
Gold price to stay low
In the meantime one does not expect the spot gold price to go above $1,350, and will probably find support between $1,270 and $1,280.
Repeatedly QE has been referred to as ‘bullion friendly’ however our research, out today, suggests that in the current round of easing this has not been the case.
Should tapering go ahead we expect there will be a drop in the price of gold. However, as we explain in our most recent research note, QE has not been the major driver of the gold price during this bull market. It is also worth noting that the bulk of tapering-based gold declines have already been factored into the price in recent weeks and months.
Whilst many Western investors appear to be concerned about the impact of the FOMC’s announcement we have little doubt that Eastern investors won’t be looking to snap up a few more bargains, courtesy of the Western currency wars. Long term we remain unconvinced of tapering’s effect on the price of gold, given the other fundamentals that have supported gold since 2001.
Will they, won’t they?
Of course, the above is assuming tapering will happen. It is worth mentioning however that in the written feedback from a recent survey we carried out, clients and readers told us that they thought it unlikely tapering would go ahead. This is in contrast to a Barclay’s survey that saw 64% of respondents say they expect tapering to begin this week. Should tapering not go ahead this month then we are likely to see higher gold prices in what will be a bit of a backlash. We also expect to see renewed interest in retail buying should the price fall below $1,300.
India’s war on gold
In other news the Indian government yesterday announced a rise in import duties on jewellery. Now at 15%, the increase comes just in time for India’s key festival and wedding season. The official line for the move is that it was done to protect the country’s domestic jewellery industry. This has suffered significantly as a result of rampant controls that have been in place since April. Around 500,000 individuals are purported to have lost employment as a result of the gold controls currently in place.