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Next Fed Meeting Eyed as Potential Gold Catalyst

Release Date: 
Tuesday, November 27, 2012

Gold traded lower today as Greece reached an agreement that allows the country to receive a 44 billion euro ($57 billion) aid payment. The agreement also paves the way for future installments as Greece works to reduce its national debt through austerity programs. The price of gold was $5.60 lower at 7:43 a.m. Pacific Time on the New York Spot Market, trading at $1,744.80 per ounce. Spot silver was $0.17 lower at $34.11 per ounce. (Click here for the most current spot prices.)

Gold option contracts are due to expire midweek, which may support prices according to HSBC. “With much trading activity gravitating around the $1,750 an ounce level, we anticipate the expiration will be modestly price-positive for gold.”

British bank HSBC believes gold may rise on market expectations of further monetary easing at the December 11 meeting of the Federal Open Market Committee. “The Fed cannot continue with ‘Operation Twist’ since holdings of short-term Treasuries will have been exhausted. This means the FOMC could shift directly into another large-scale asset purchase program,” said Kevin Logan, HSBC’s chief U.S. Economist. Under its current “Operation Twist,” the Fed sells short-term Treasuries while purchasing longer-term ones, helping to keep interest rates low.

“Bullion is historically sensitive to monetary easing expectations. We have noted…that gold tends to react more favorably to Fed announcements of outright asset purchases when compared to maturity extension programs such as ‘Operation Twist.’ As such, an announcement by the Fed of another round of quantitative easing would be a bullish case for gold,” said Jim Steel, HSBC precious metals analyst.

Blackrock Portfolio Manager Catherine Raw offered her outlook for gold price and investment strategy. “Really, it’s about currency depreciation as well as inflation and real interest rates,” Ms. Raw said.  “We’ve got the U.S. trying to weaken versus other currencies but at the same time we’ve got the Japanese trying to manipulate the yen and we’ve got the ECB acting to weaken the euro.”  

“When you look at what’s happened in the last few months, we’ve seen China cutting interest rates, we’ve seen the U.S. embarking on a third round of quantitative easing, and most importantly, an open-ended nature of quantitative easing that doesn’t care about inflation. When you actually look at the probability for the gold price on a two to three year basis….the drivers are back in line to really get bullish on the outlook for the gold price over the next twelve to eighteen months.”

 (Sources: “Gold Unchanged After Greek Deal; Firmer Dollar Weighs,” CNBC, November 27 2012; Gold falls as market weighs Greek deal, U.S. data,” Marketwatch, November 27, 2012;
Is Gold Still a Bullish Bet? Bloomberg, November 26, 2012; “Gold may be boosted by QE expectations from Dec FOMC Meeting,” Commodity Online, November 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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