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Fed Minutes Show Increased Probability of Monetary Easing

Release Date: 
Thursday, August 23, 2012

Gold prices rose for a seventh day after yesterday’s release of Federal Open Market Committee (FOMC) minutes which suggested the central bank may adopt a new round of monetary stimulus in the near future. Gold broke above key trading levels and was $14.80 higher at 7:37 a.m. Pacific Time on the New York Spot Market, trading at $1,669.90 per ounce. Spot silver was $.79 higher, trading at $30.72 per ounce.  (Click here for the most current spot prices.)

Gold climbed to its highest level in 16 weeks after breaking above the 200-day moving average. This metric is an important technical level and a climb above it has the potential to spur buying, according to Commerzbank AG.

"Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery," the Fed minutes said. 

"The probability of [Fed action] coming in mid-September now seems to be higher," said Paul Ashworth, chief U.S. economist of Capital Economics. "One or two of us economists thought the slightly better data in recent weeks might have put the Fed off, but I wouldn't have thought so reading these minutes." Few economists have described the economic improvements recorded since the last Fed meeting as substantial.

"The Fed's tone is totally different in the minutes from previous comments, and that helped gold break from the previous range and move into a higher price range ahead of the peak consumption season," said Chen Min, an analyst at Jinrui Futures.

"You're now getting the majority of the [FOMC] voting members coming around to the idea that another action is needed," said Ira Epstein of Linn Group. "We've been trading in anticipation of this...the gist of the minutes were that easing does seem to be around the corner," said Dave Meger, director of metals trading at Vision Financial Markets.

“Investment demand is in the driver seat and the technicals are looking very positive,” said Bayram Dincer, an analyst at LGT Capital Management. “Gold is again in the investor focus now that we have potential trigger events coming up, which could indicate more global monetary stimulus.”

“The gold market now seems to be in bull mode and any friendly news is gratefully received,” said David Govett, global head of precious metals at Marex Spectron Group Ltd., said in a report. “It is election year and the pressure is on for a short-term fix, making the possibility ever more likely,” he wrote, referring to quantitative easing from the Fed.

(Sources: “Fed Moving Closer to Action,” Wall Street Journal, August 23, 2012;  “Gold Rallies To A 16-Week High As Fed May Add Stimulus,”Bloomberg, August 23, 2012; “Gold up for seventh day after surprise Fed policy nod,” Reuters, August 23, 2012; “PRECIOUS METALS:  Gold Extends Gains After Close as Fed Stokes QE Hopes,” Wall Street Journal, August 23, 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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