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Catching a Falling Financial Knife

Gold & Silver Fall Hard from 2-Week High as New Fed Easing Spooks Traders

Commodities / Gold and Silver 2012 Dec 13, 2012 - 09:41 AM GMT

By: Adrian_Ash

Commodities

GOLD and silver fell hard overnight and early Thursday in London, dropping as European stock markets also fell and the US Dollar rose despite yesterday's latest "easy money" policy from the Federal Reserve.

Holding its key interest rate in the record low range of 0% to 0.25% for the 48th month running, the Fed's open market committee swapped its guidance for any rise in interest rates from mid-2015 to a target unemployment rate of 6.5% or below.


The Fed also confirmed it will begin a new round of quantitative easing in January, spending $45 billion per month to buy US government debt with no limit on the program's total purchases.

"Any QE should be positive for the yellow metal," said one wholesale gold dealer before Wednesday's announcement.

Yet after jumping $10 an ounce to a 2-week high of $1723 on the news, the Gold Price then fell back, dropping through $1700 at the start of Asian trade.

"What is behind this weakness?" asks Dubai-based gold dealer INTL FCStone.

"We suspect that with the Fed now on a prolonged easy stance, the lack of progress coming out of Washington with respect to the fiscal cliff talks [regarding $600bn of scheduled US spending cuts and tax hikes] is causing increasing concern.

"We would rather watch things from the sidelines for the time being, as the markets are getting too choppy to trade."

More than 60% of the new, open-ended QE program will be spent on medium and long-term US Treasury bonds, the New York Fed said yesterday.

Yet longer-dated US bonds fell early Thursday, pushing the interest rates they offer to investors higher.

The US Dollar meantime reversed an overnight drop versus the Euro and British Pound, helping the gold price in those currencies recover a little from 1-week lows.

Silver fell to $32.79 on Thursday morning, down $1.00 per ounce from Wednesday's 2-week high.

"We remain gold bulls," says Swiss investment and bullion bank UBS in a new commodities review today.

"Ongoing uncertainty around US fiscal issues, together with the view that major central banks will maintain loose monetary policies for longer, are key supports of our outlook.

"Gold's 'X-factor' is a resolution [to the fiscal cliff] that includes a lift to the debt ceiling which, in turn, increases the likelihood of ratings agency action [ie, downgrading the United States' long-term credit rating], boosting gold's popularity in 2013."

The Bank of Japan is meantime planning to allow hedge funds and other financial speculators to receive money from its quantitative easing program, according to Bloomberg, removing the current restriction on interbank lending.

Bloomberg's "insider sources" also say the BoJ wants to avoid boosting Japan's huge government debts, and so will target private-sector assets with its newly-created money instead.

"While the Yen has fallen almost 5% against the Dollar in the past month," notes the newswire, "it's still stronger than the ¥100 per Dollar that Nissan Motor Co. chief executive Carlos Ghosn said is the currency's 'neutral range'."

The Swiss National Bank remains "prepared to buy foreign currency in unlimited quantities" it said again today, creating and selling Francs on the FX market to its hold its value beneath €1.20.

Swiss banking giant UBS this week joined its rival Credit Suisse in setting its short-term interest rate for depositors below zero, charging account holders for running a positive balance.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

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 2012

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.

Adrian Ash Archive

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Catching a Falling Financial Knife