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Gold Jumps Ahead of Fed Interest Rate Decision

Commodities / Gold and Silver 2010 Mar 16, 2010 - 09:33 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF WHOLESALE gold bullion jumped at the start of New York dealing on Tuesday, recovering half of last week's losses for US and Eurozone investors ahead of today's decision on Dollar interest rates from the Federal Reserve.

New data showed economic sentiment sliding in the 16-nation Eurozone, while Consumer Price Inflation came in at just 0.4% for Feb. – half the expected pace.


US import prices turned negative, down 0.3% from Jan. on average, while New Housing Construction fell 5.6%.

"I don't think you should have any expectation" of a rate increase before 2011, says former Fed governor Laurence Meyer, speaking to Bloomberg.

"A lot of people [in the gold market] are waiting for the Federal Reserve meeting later today," says refinery group MKS's senior vice-president for precious metals trading Afshin Nabavi, speaking to Platts.

"The market is confused, waiting for news. But there was no sign of large stops being hit [below $1100, and sparking heavy sales] like everyone was talking about."

The US Dollar fell hard vs. the Euro and British Pound as New York markets opened this morning, but gold prices outpaced their gains to reach €819 and £742 an ounce respectively.

Today's Federal Reserve announcement – which is certain to leave the cost of central-bank loans unchanged at 0% according to the futures market – is also expected to repeat its long-standing promise of "exceptionally low" interest rates for "an extended period".

"If either of these phrases is removed from the Fed statement, look for the metals to come under pressure," says one London gold dealer in a note. But "Gold still seems the least overextended [commodity]," counters Walter de Wet in today's Standard Bank comment.

The bullish position held by speculative traders in Comex gold futures remains "almost flat at 33.6% of open interest," he adds – "still well below the 42%" of all open contracts reached in September 2009.

On a gold-equivalent basis, the "net long" position of bullish minus bearish bets held by speculative players "is also largely unchanged" from early March, says de Wet, some 20% below the peak of last October.

Over on the supply side of the market, and despite the price of gold hitting a new record-high monthly average in each of Oct., Nov. and Dec. 2009, "We have not observed a shift in the attitudes of [gold mining] producers towards hedging," says GFMS in its latest quarterly report for Société Générale.

"These views remain firmly in line with the anti-hedging sentiment of prospective gold equity investors," says the London consultancy, explaining why the Shrunken Gold Hedge Book Will Stay Shrunken.

Over in the Treasury bond market, meantime, "People are heavily biased towards rising rates once the Fed ends its mortgage buying at the end of the month," says Nomura Securities head of US interest-rate strategy, George Gonclaves, to the Financial Times today.

"It's a clear case of too much cash chasing too little yield," says MF Global's senior vice president John Brady, noting that US interest-rate swaps – which are based on private inter-bank lending costs – have sunk to record lows compared to US Treasury bond yields.

UK swaps have in fact fallen below comparable gilt yields, says the Financial Times, showing "the huge amount of [new government debt] supply that must be digested by the market" according to Alex Li at Credit Suisse.

In Brussels overnight, finance ministers from the 16-nation Eurozone said they had agreed "technical modalities" for emergency loans to Greece, but gave no specifics or figures.

"Growth alone will not resolve an increasingly complicated debt equation" for Germany, France, Spain, the UK and the United States, says Pierre Cailleteau, chief analyst of a new report from the Moody's rating agency which says the "triple-A" status of their government debt may be at risk.

"We are not talking about revolution...but preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion."

Government bonds ticked higher as the US stock market began the day with a slight loss on Tuesday, nudging open-market interest rates down.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


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