Gold Market Awaits Fed Meeting

(Kitco News) – Gold market participants will hold their collective breath next week awaiting the outcome of the Federal Open Market Committee meeting on Tuesday and Wednesday.

The meeting’s focus for traders will be what the Fed says about its $85 billion bond-buying program, referred to as quantitative easing. Recently there were worries that Fed officials would announce that they are going to start dialing back on stimulus, but analysts and economics said recent economic data isn’t quite strong enough for the Fed to start tapering.

Because of this, gold prices may trade quietly ahead of the Fed’s decision and take direction from there.

August gold futures rose Friday, settling at $1,387.60 an ounce on the Comex division of the New York Mercantile Exchange, up 0.33% on the week. July silver rose Friday, settling at $21.954 an ounce, up 0.97% on the week.

In the Kitco News Gold Survey, out of 36 participants, 23 responded this week. Of those 23 participants, 15 see prices up, while six see prices down and two see prices moving sideways or are neutral. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.

Financial markets sold off this week on fears that the Fed could act as soon as Wednesday to reduce stimulus. However, several financial analysts said those fears eased when a story in the Wall Street Journal Thursday by Fed watcher Jon Hilsenrath said the Fed would calm down expectations for a rate hike by pointing out that tapering its bond-buying program is much different from hiking the Fed funds rate, and that any rise in rates is a long way off.

In addition to the Fed’s statement, this meeting is one where Bernanke will take questions from the press, so there will be more for the markets to digest.

Edmund Moy, chief strategist from gold-backed IRA provider Morgan Gold, said he expects some volatility in gold prices in the short term, particularly as traders prepare for the Fed meeting. He, like many others, doesn’t expect the Fed to announce any change to the program next week.

“While the Fed has signaled flexibility in the size of QE, they still are not even close to the unemployment and inflation numbers to trigger a reduction. However, several FOMC members are concerned that the level of QE is not sustainable.

“Bernanke is also frustrated with the President and Congress not getting our fiscal house in order because monetary policy can only take the economy so far, and is making QE reduction noises to signal to the President and Congress that they have to step up to the plate. Besides, fiscal policy should be the driver because it’s made by elected officials, whereas monetary policy is not,” Moy said.

Instead of the announcement of a tapering in June, economists now expect the earliest would be at the September meeting.

“How the (financial) market reacts to what we expect to be a less dovish June statement will be determined by the narrative that develops at the press conference,” said Millan Mulraine, director, U.S. research and strategy at TD Securities.

Mulraine also said Bernanke will use his post-meeting press conference “to emphasize the message that even when the QE purchase size is cut, the Fed will still be easing policy, albeit at a slower pace.”

If there is nothing surprising from the FOMC meeting, gold prices could remain in their range of $1,370 to $1,425. There’s been little conviction to push prices either way, said Afshin Nabavi, head of trading at trading house MKS (Switzerland) SA in Geneva, Switzerland.

“The summer doldrums are here, even if the weather doesn’t feel like it,” he said, adding that buying comes in when prices fall to the $1,370s, while selling arrives when prices near $1,425.

Moy also pointed out that gold prices are capped because of the large number of short position holders, as noted in weekly data from the Commodity Futures Trading Commission.

Physical demand remains solid, but is off the levels seen in April, Nabavi said. Volume of that size was likely a “once-in-a-lifetime event,” he added.

Ira Epstein, director of the Ira Epstein division of the Linn Group, said he is neutral on gold prices, leaning to be bearish, noting the narrow price range. He also said historically gold prices are usually week during the June to early July timeframe.

“While past history is not a guide for the future, it is important enough to pay to attention to as it offers some insight into future demand. Being summer, demand in some markets tends to taper off, which is what gold has been seeing,” Epstein said.

Follow me on Twitter! If you want to keep up with metals news and features, then follow me on Twitter. It’s free, too. My account is @dcarlsonkitco

By Debbie Carlson dcarlson@kitco.com

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