Most financial-market participants do not expect the Federal Reserve to pull the trigger on quantitative easing as early as Tuesday. And that, some say, could mean a temporary retreat in gold prices, should some disappointed longs sell to exit positions.
But it won’t be enough to reverse the longer-term uptrend, observers said.
The Federal Open Market Committee meets Tuesday, with a post-meeting statement expected at 2:15 p.m. EDT (1815 GMT). With the federal-funds rate near zero percent, policy-setters would have to use alternative tools such as quantitative easing —in which they buy Treasury or mortgage securities in a bid to push the long-term yields lower—to further jump-start the economy.
Some traders have bid gold higher lately on expectations that more quantitative easing may be coming from the Fed. However, the market majority does not expect it just yet.
“We believe there will be no move to sanction further quantitative easing at this meeting,” said Robin Bhar, senior metals analyst with Credit Agricole CIB. “We believe they will reiterate what they said most recently, and that is the incoming economic data will be watched closely. And if there is a marked deterioration, this will be one of the cues to perhaps move to sanction (quantitative easing) at the next meeting in November.”
Frank Lesh, broker and analyst with FuturePath Trading who monitors a range of markets, including gold and interest-rate futures, suggested the economic data lately has not been weak enough to trigger quantitative easing yet. He described Monday’s main U.S. report, from the National Association of Home Builders , as largely neutral. The home-builders confidence index remained at 13, matching the 17-month low in August and only one notch below expectations for a 14 reading.
“It is a possibility,” Lesh said of quantitative easing. “But it’s possible only if things start to look worse. They might say ‘we can if we need to,’ or something like that.”
Adam Klopfenstein, senior market strategist with Lind-Waldock, pointed out that equities are higher so far this month, also reducing the potential for a quantitative easing. The Dow Jones Industrial Average was trading at 10,709.80 late Monday morning, up 6.9% from the Aug. 31 close. “I would be very shocked if the Fed uses some of their bullets when they don’t need to,” Klopfenstein said.
A research note from Brown Brothers Harriman said newswire polls suggest the market majority does not expect quantitative easing just yet. BBH pointed out that in a speech several weeks ago at a Fed symposium in Jackson Hole, Wyo., Chairman Ben Bernanke set the bar at “significant deterioration” of the economy to spur the Fed into more action.
“This has not been seen in recent data,” BBH said. “He also opined that the pre-conditions exist for higher growth in 2011…Officials are often loath to make a decision until circumstances force their hand.”
Bhar said as long as the annualized U.S. Consumer Price Index holds above 1%, Fed officials may be less likely to turn to quantitative easing since this means less fears about deflation. The August CPI report showed yearly inflation of 1.1%.
No Quantitative Easing Tuesday Could Mean Price Dip For Gold
Some of the buying that propelled gold to record highs last week and again on Monday was due to ideas in some camps that the Fed just might turn to quantitative easing as early as this week, Bhar said.
“But we don’t think they will say that. So gold will probably ease after the statement is released, because there will be some longs that will be disappointed,” Bhar said.
Gold conceivably could pull back by $10 to $15 should there be no quantitative easing, Bhar said. Still, he said, “there should be good support around $1,250 to $1,260. Physical demand should resume on dips. So there won’t be a major sell-off.”
Lesh said the lack of quantitative easing might prompt some profit-taking in the immediate aftermath of the Fed meeting. “But it won’t be enough of a setback to stop this gold,” he said. In fact, Lesh said, some market participants are likely to use any kind of price dip as a buying opportunity.
If the Fed should surprise the market majority and announce quantitative easing as early Tuesday, however, this would be bullish for gold, Bhar and Lesh said. “Obviously, we would see $1,300 come pretty quickly,” Bhar said.
Low Interest Rates Likely To Provide Further Long-Term Support
Regardless of what the Fed does with quantitative easing, gold is likely to remain in an uptrend as long as policy-setters leave interest rates essentially at zero, said Leonard Kaplan, president of Prospector Asset Management. This will encourage further buying on sheer momentum, he said.
“I’m bullish like crazy,” Kaplan said. “There is nowhere else money can go. Does gold deserve to be here? Absolutely not. Is it a bubble? Absolutely. Will it go higher? Absolutely.
“Gold is going up because people are buying it. And people are buying it because it’s going up. It’s momentum play.”
Whenever the Federal Reserve does hike rates, “it’s not going to be pretty,” Kaplan said. “But the Fed’s not going to raise rates for at least a year or two. Do we go to $1,500 first? Probably.”
Some of gold’s support has come from currency-related factors, as well as anticipation that the longer Fed officials maintain loose monetary supply, the greater the prospects for eventual inflation, Klopfenstein said. “And we’re seeing inflation in the grain markets right now,” he added, pointing to recent price increases in corn and soybeans.
“Whether you’re talking inflation or deflation, people feel gold as an asset they want to own,” he said, citing a desire for portfolio diversification.
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