(Kitco News) – Gold and other financial markets will watch the outcome of next week’s two-day Federal Reserve meeting to see if the Fed finally starts to reduce the stimulus program it has had in place for the past several years.
Gold prices fell sharply this week in part on the idea that after the conclusion of the Federal Open Market Committee meeting Tuesday and Wednesday, the Fed will announce some sort of tapering of its bond-buying program known as quantitative easing. The Fed embarked on the program to stimulate the economy, and gold prices benefitted from the ultra-loose monetary policy.
December gold futures fell Friday, settling at $1,308.60 an ounce on the Comex division of the New York Mercantile Exchange, down 5.6% on the week. December silver fell Friday, settling at $21.720 an ounce, down 9% on the week.
In the Kitco News Gold Survey, out of 36 participants, 21 responded this week. Of those 21 participants, 10 see prices up, while 11 see prices down and one is neutral. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.
In addition to the Fed, Afshin Nabavi, head of trading at trading house MKS (Switzerland) SA in Geneva, said there were three other factors that weighed on gold this week. First was the move to deal with Syria’s chemical weapons diplomatically and not militarily.
Second was lackluster physical gold demand, particularly out of India where new government restrictions have dented demand. Third was Friday’s news report out of Japan that President Obama would name Lawrence Summers as the next Fed chief.
“That weighed on markets, but when the White House came out and denied the report, the market came back a bit,” he said.
On Friday, December gold fell as low as $1,304.60. That’s close to the 50% retracement level from the June low of $1,180 and the August high of $1,434, technical analysts said. If the area can hold, gold might find short-term support, if it cannot, then gold could fall to the next area of support at $1,280.
After much discussion since May when Federal Reserve Chairman Ben Bernanke first floated the idea of curbing QE if the economic data warranted it, market participants and economists expect the Fed to give more concrete details of their plans. Right now the Fed is buying $85 billion monthly in U.S. Treasury and mortgage-backed securities.
Nabavi called what may happen at next week’s FOMC meeting “the million-dollar question.”
Results of Wall Street Journal survey show that two-thirds of market participants expect the FOMC to announce tapering next week.
While the majority of economists and market participants expect some sort of tapering by the Fed, even if it is as little as $10 billion a month, Nabavi said he’s taking a contrarian opinion that the Fed won’t act at this meeting. If that’s the case, gold could see a swift rebound, he said.
Another director of trading at a bullion bank said if the Fed just talks about tapering in the future and takes no action, “we could see a real knee-jerk reaction higher in gold.”
He added, though, if the Fed does taper, gold could weaken further. Either way, he said, gold prices could be volatile, so market participants should brace for whipsaw action.
Adam Klopfeinstein, market strategist with Archer Financial Services, said there’s really no reason to think that the Fed won’t announce some sort of tapering next week and that gold will continue to fall.
“Gold’s in a bear pattern. By the end of the week I think we’ll be at least a little under $1,300, which really isn’t far from where we are now,” he said.
Bart Melek, vice president and director, head of commodity strategy, rates and foreign exchange research at TD Securities, said he cautions against taking a short position going into the meeting in case the Fed is more dovish. By focusing so intently on the cut to QE, Melek said traders may have overlooked “the very real possibility that two of the Fed’s policy thresholds may be adjusted down—the explicit unemployment rate threshold for Fed Funds hikes, which is currently at 6.5% and the tacit 7.0% guidepost at which QE3 will end.”
Melek said TDS expects the first to be lowered to 6.0% in the upcoming FOMC statement, with a rising probability that the second will also be lowered by a half-percentage point, to 6.5%.
In the short-term the market might overestimate the Fed’s actions, but longer-term, Melek said, gold’s trend id down. “A more (dovish Fed) tone or not, gold will trend down below $1,200 as 2014 unfolds, as we expect real yields to rise along with an improving economy,” he said.
While gold’s losses grabbed the headlines, a few analysts noted that silver was hit harder than gold. That’s not unusual since silver historically is more volatile than gold. On Thursday, silver fell 6% to a four-week low and on Friday extended those losses.
“Silver is thus once again fully living up to its reputation of following gold’s price movements to a disproportionate extent,” said Commerzbank.
Barclays said after Thursday’s “very bearish” trade in silver further weakness in possible. They put downside targets at $21.68, $20.85 and $19.70. They said if silver rallies to $23, then that presents a selling opportunity.
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By Debbie Carlson firstname.lastname@example.org