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Analysts Discuss Fed Bond Program and Gold

Release Date: 
Thursday, September 22, 2011

The Federal Reserve announcement of "Operation Twist," a program to exchange short term government bonds for long term notes, prompted comments by analysts who explained the resulting gold sell-off and the long term forecasts for the yellow metal.

The central bank warned of "significant" downside economic risks to the U.S. economy as it unveiled its new $400 billion program to shift its $2.85 trillion balance sheet more heavily towards longer-term debt. The widely anticipated move disappointed investors who had held hopes for stronger stimulus measures. More concerning, however, was the Fed’s suggestion that the global economy may be sliding into another recession, leading to a selloff in stocks and a liquidation of precious metals to cover these losses.

Analysts at FXPro said the market had been expecting a third round of quantitative easing or a strong indication that it was being considered. "There were neither, which is why we’ve seen the dollar rise (on general risk aversion plays) and Asian stocks sell off," FXPro analysts in a note.

The dollar index rose to seven-month highs as investors fled to the dollar. "Looking at gold, you have periods when you have strength in the dollar and rising gold, when both are seen as safe-havens, but right now, you'd have thought that gold would be well supported given the European situation, the U.S. situation and a slowing China," said Societe Generale analyst David Wilson.

"The crucial hurdle for gold now is U.S. dollar strength," said UBS analyst Edel Tully. Still, this obstacle is not "insurmountable," and the overall macroeconomic backdrop remains supportive of the metal, "particularly given escalating concerns on global growth and the crisis in Europe," she said.

"We regard the current price weakness as temporary and not lasting," Commerzbank analysts said in a research note. Investors should expect very low or even negative real interest rates for both long and short maturities for some time, the analysts said. "Market players are now likely to turn their attention back to the debt crisis in the euro zone.  In the current climate, gold should remain in strong demand as a safe haven."

(Source: "PRECIOUS-Gold falls as dollar gains; palladium at 10-month lows," Reuters, September 22, 2011; "Gold falls over $50 as dollar gains in wake of Fed," MarketWatch, September 22, 2011; "Gold Slips, Hurt by Dollar Strength," Wall Street Journal, September 22, 2011)

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