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Gold futures are likely to rise even higher if the Federal Open Market Committee announces further monetary easing Thursday, but a market with already-heightened expectations for such an outcome would be vulnerable to a sell-off if the Fed does nothing, analysts said.
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Nevertheless, observers said, any pullback could be limited if the Fed uses language that signals policy-makers remain dovish and easing is still a possibility down the road.
Much of gold’s recent focus has been on Fed monetary policy. Gold for December delivery, traded on the Comex division of the New York Mercantile Exchange, hit high of Friday of $1,745.40 an ounce, a gain of 9.6% since the mid-August low, largely on hopes for further stimulus not only from the Fed but also the European Central Bank and China. The contract reached its strongest level since Feb. 29, which happens to be when the metal began a several-month correction lower after congressional testimony from Federal Reserve Chairman Ben Bernanke was construed to mean reduced hopes for easing.
The market back then had received a string of reports showing improvement in the labor market. But since, data has softened again and expectations for further FOMC easing have rebuilt. December gold gained $30.50 on Aug. 31, when Bernanke said at a Fed symposium in Jackson Hole, Wyo., that “stagnation” of the labor market is a “grave concern.” And the contract rose another $34.90 Friday when the government reported non-farm payrolls rose only 96,000 in August.
With the federal-funds target rate already effectively at zero, the market is watching to see whether the Fed undertakes a third round of Treasury security purchases, intended to drive down long-term yields, referred to as quantitative easing. Should the Fed act, the extent of any gold rally will hinge on the size of the Fed’s program and the specifics, said Sterling Smith, futures specialist with Citi Institutional Client Group.
“Most likely if we see it, I think gold can surge,” he said.
Jim Comiskey, senior account executive for Archer Financial Services, said the precious-metals market has largely already factored in more easing.
“Having said that, I think it’s going to lead to more dollar weakness,” he said. That, in turn, tends to support precious metals and other commodities.
Carlos Sanchez, director of asset management with CPM Group, said outright easing would support gold and silver the most among commodities, even though such expectations are already priced into the market.
However, gold likely would drop if the Fed does nothing, which some observers said is possible in particular if Bernanke wants to avoid any appearance that he might be trying to influence political elections in November.
“You could see a two- or three-day bout of profit taking,” Comiskey said. “The dollar would probably soar in that event.”
George Gero, vice president with RBC Capital Markets Global Futures, also cited potential for liquidation if there is no Fed action, considering the sharp rise in open positions as gold rallied over the last month. Comex open interest stood at 456,913 contracts as of the end of business Monday, compared to 386,055 on Aug. 15.
“I think they (market participants) would look for more easing down the road, but I would expect to see profit taking to take place very quickly, with stop-loss orders,” Gero said. These are pre-placed orders triggered when certain chart points are hit.
Smith figured gold could fall as much as $30 to $40 an ounce quickly if there is no easing. However, he added, this also would hinge on just what kind of language policy-setters use.
“If the verbiage appears to come across being a little bit looser, that will be good for gold,” Smith said. “If they find some new…words to hint at it happening, that will alleviate the losses. But if we don’t see a change in the verbiage and see no action, that will pressure gold back down, at least temporarily.”
Even if the Fed does not announce any easing, investors may look for further accommodation at a future meeting, said HSBC in a research note.
“Based on this, it is likely that even if the Fed does not embrace additional easing via a new bond-purchasing program, gold prices are unlikely to sell off too steeply,” HSBC said. “This is because market participants will still likely retain expectations of future easing, and therefore harbor a bullish gold outlook. If the Fed announces additional easing, the gold rally should revive but the near-term upside is probably limited as some degree of additional easing is already built into prices.”
Sanchez looks for a broad range of markets, including gold, to sell off if there is no easing and the Fed simply does something like extend its expected low-rate time frame. “There’s also the chance of a ‘buy the rumor, sell the fact’ reaction,” he added.
Expectations For QE Build But Not Unanimous
UBS said in a Monday research note that Friday's U.S. jobs report strongly raised the likelihood of the Fed announcing quantitative easing at its FOMC meeting later this week. “UBS economists now believe that the announcement will probably take the form of outright purchases of U.S. Treasuries and perhaps mortgage-backed securities,” the bank said. ?HSBC said the FOMC is widely expected to extend its low-rate guidance from late 2014 to a later date, at least mid-2015. However, the bank said views diverge on whether the FOMC will announce additional accommodation in the form of more bond purchases.
Comiskey puts the probability of another round of quantitative easing at around 75%, probably to the extent of $600 billion to $700 billion of Treasury and mortgage securities. “With last Friday’s atrocious jobs report, Bernanke has a free license to roll out the next QE and not be accused of being a political animal (ahead of elections),” Comiskey said.
Sanchez puts the odds of outright quantitative easing at 50-50. On the one hand, inflation is stable and the unemployment rate “too high,” which means potential for action, he said. Yet, while QE3 is a possibility, policy-setters also could say they’ll extend the low interest-rate time frame until 2015. And if the Fed does buy bonds, it may be less substantial than the $600 million program undertaken in 2010, he continued.
“The Fed has even said that they can’t step into the market each year to try and kick-start the economy with nontraditional monetary tools,” Sanchez said. “I think they’ll take action and say they’ll extend the low interest rate timeframe, but as far as QE3 goes--that is bond buying–I’m 50-50 on that.”
By Allen Sykora and Debbie Carlson
