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Fed Announces New Quantitative Easing – Links Policy to Unemployment

Release Date: 
Thursday, December 13, 2012

The price of gold fell on year-end profit taking today despite a major announcement from the Federal Reserve yesterday expanding liquidity through Treasury asset purchases. Gold was $14.00 lower at 7:57 a.m. Pacific Time on the New York Spot Market, trading at $1,698.60 per ounce. Spot silver was $0.93 lower at $32.62 per ounce. (Click here for the most current spot prices.)

The Fed will replace its expiring “Operation Twist” stimulus program with a more robust commitment of $45 billion monthly in Treasury debt purchases, adding to the $40 billion per month in mortgage-backed bonds it began in September. The Fed also took the unprecedented step of pledging near-zero interest rates as long as unemployment remains above 6.5 percent. The central bank will also hold rates as long as inflation was projected to be no more than 2.5 percent one or two years ahead and inflation expectations were contained.

"It takes a little while to sink in that the Federal Reserve is focusing more and more on employment and less and less on inflation," said Axel Merk, chief investment officer of Merk

Funds. "The Fed did not put a calendar date on these Treasury purchases, so it's all systems go at this point, it's an extremely bullish situation," said Ira Epstein, director at the Linn Group.

Surprisingly, gold markets sold off despite the bullish liquidity announcement from the Fed.

"The temptation to lock-in profits as we near year-end was strong, and gold sold off," said UBS in a note. "But despite the decline...we don't think the sentiment towards gold has actually turned negative.”

James Steel, an analyst at HSBC Securities, said “We view the [Fed] announcement as bullish, but noted that markets had expected and priced in the new quantitative easing. “In the long run, the ongoing monetary expansion is supportive of gold, especially if it is a factor weighing on the U.S. dollar.”

The sluggish U.S. economy is not widely expected reach the Fed's new unemployment target in the near future. On Friday, the Labor Department said that the unemployment rate fell to a near four-year low of 7.7 percent as companies maintained a slow but steady hiring pace in November. "That's a bullish for gold for the Fed to say it will keep interest rates low until unemployment rate drops to 6.5 percent - it doesn't look that's going to happen anytime soon," said Bill O'Neill, partner of commodities investment firm LOGIC Advisors.

"With the last Fed meeting out of the way – and we know what we are getting in terms of a [stimulus] program – I think the focus will certainly be on the fiscal cliff over the last couple of weeks of the year," said Cameron Peacock, a strategist with IG Markets in Melbourne. "A lot of people are going into the year end and not knowing what's coming down the pipe," said Bob Haberkorn, senior commodities broker with RJO Futures.

(Sources: “PRECIOUS-Gold falls in line with stocks after Fed stimulus,” Reuters, December 13, 2012; “PRECIOUS-Gold rises after Fed makes surprise low-rate pledge,” Reuters, December 13, 2012; “Gold prices skid on profit-taking after Fed,” Marketwatch, December 13, 2012; “Precious Metals Under Pressure in Asia, Ignoring Fed Stimulus,” Wall Street Journal, December 13, 2012; “Precious Metals Futures Surge on New Easy Money Program,” Wall Street Journal, December 12, 2012)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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