Tuesday, September 29, 2009

>FOMC statement seen as neutral to supportive for gold

Analysts described the post-meeting statement from the Federal Open Market Committee Wednesday as neutral to supportive for gold futures.

Some suggested the ongoing low-interest-rate environment will mean further pressure on the dollar and eventually lead to inflation, both of which tend to lead to the buying of gold.

Yet, some also said the Fed's lack of fear over inflation may also cool market sentiment, perhaps meaning sideways trading for a while.

The FOMC left the federal-funds target at zero to 0.25%, as expected.

The Fed officials said economic activity picked up but will remain weak for a while yet. They also said inflation is likely to remain subdued "for some time," meaning interest rates can remain low for an "extended time." The statement indicated the Fed will extend mortgage-security purchases into 2010 but complete Treasury purchases in October.

In the aftermath of the FOMC statement, December gold on the Comex division of the New York Mercantile Exchange ticked up from around $1,012 an ounce a few minutes ahead of time to $1,019.70 five minutes later, before gradually backing off.

"I think you could probably see higher prices for the medium term on the basis that low interest rates are going to help stimulate what the stimulus spending was trying to do," said George Gero, vice president with RBC Capital Markets Global Futures.

For starters, eventual economic recovery may mean eventual inflation, observers said.

"The Fed made the statement that things are improving, although there are some problems with employment that are going to limit the rate of recovery," said Bart Melek, global commodity strategist with BMO Capital Markets. "But at the same time, they have said they will continue to provide liquidity in the system broadly."

Even though the Fed doesn't see inflation on the horizon, gold investors may see an increased chance of rising price pressures farther down the road, he continued.

Even if inflation does not kick in, "the concerns will mount, especially from those looking for that and who participate aggressively in the gold market," Melek added.

Adam Klopfenstein, senior market strategist with Lind-Waldock, said he doesn't anticipate inflation becoming an issue before late 2010 or early 2011. Still, he said, the Fed intentions could mean further pressure on the dollar that helps gold.

Furthermore, some market participants may not want to pile all of their money into foreign currencies such as the euro, he said.

"Gold is the most advantageous play if you don't want to be involved with any type of currencies," he said. "Even though the euro has had a nice rally, people are questioning whether they want to have all of their money in euros at this point. So people are saying, 'get me in the real reserve currency in the world, which is gold.'"

Gero said that whenever there are pullbacks due to profit-taking, or selling by those who have already bought at lower prices, fund buying often emerges on a scaled-down basis.

"If it does trigger inflation and rates continue to stay low, that is a formula that helps gold maintain purchasing power," Gero said. "And it continues to put pressure on the dollar."

Dan Cook, senior market analyst with IG Markets, doubts the FOMC statement will have a major impact on gold either way. In particular, he cited the portion in which policy-setters expressed doubts about inflation for the foreseeable future.

"They are still saying inflation is not going to be an issue for some time, and that might kind of stifle the run we've seen in gold," Cook said. "We might hover around this $1,000 level for a little while here. I wouldn't be surprised to see us move sideways for a little bit."

Klopfenstein said he anticipates increasing volatility with two forces at work in the market.

Selling on one level will come from those with profitable long positions who want to book profits, as well as others concerned about the strength of physical demand from India, he said. Support will come, however, from those concerned about more dollar weakness.

"I think it's going to be continually going up over the long term," Klopfenstein said. "But I think in the short term, it's susceptible to a sell-off."