Gold waiting on Fed action

Good Morning,

The US dollar fell to five-week lows near 81 on the trade-weighted index and some commodity markets headed higher overnight, as the waiting game for Fed policy hints began to take hold among global investors. Recent speculative talk of a second round of quantitative easing remained at the front and center of investors’ (and greenback short-seller’) preoccupations. However the certainty levels about just what the Fed might say and/or do following this week’s meeting revealed a good dose of skittishness among them as well.

A raft of economic data that shows the US economy is not yet sliding into the abyss that might prompt the launch of the “good ship QE2” has the aforementioned anti-dollar bettors just a bit on the nervous side, especially given the sizeable positions they appear to have amassed of late on the basis of such perceptions of imminent further easing, whatever the form it eventually takes might be.

The US economic growth patterns, as seen at the present time, may well not qualify for that second round of the Fed’s deflation-obsessed largesse that so many pundits are ready to bake into the market price equation for various assets. However, that same rate of economic progress away from the abyss of 2008 is still lacking the job creation levels that might make said pundits give up the claims that QE2 is about to take to the high seas.

To wit, nearly 50 percent of Bloomberg-polled economists envisage US growth at rates short of the between 2.5 to 2.8 percent that the Fed would like to witness in the coming year. As such, although the US central bank will most likely not tinker with the obvious (rates, since it pretty much cannot) it still might be making an announcement that some asset purchases will take place in coming months.

Such a plan might be unveiled even if there is no documented evidence (say, as that which is available from Japanese experience) that it will have the intended effects. The point is, it seems, that no one wants, or is prepared to handle a second unpleasant ride down the economic escalator. Thus the whatever it takes policy stance that we already got a preview of from Mr. Bernanke some time ago, might define this next post-Fed-meeting presentation as well.

Such actions will, very likely, and immediately, be interpreted as “QE2” – just bearing another name. Certainly, such Fed actions could be good for $1300-$1320 gold, and a lower greenback as well, for the time being. Let the “told you so” self-congratulatory blogs begin. Actually, they already have – you do not have to look very hard for them.

It is a time, after all, when at least one talking head seen on television (CNN) over the weekend finally uttered the famous sentence last heard in Japan (circa 2003) about “desirable levels of inflation” (say, anything near the 2% Fed target) and how a weaker dollar might make life easier. Yes, for the same camp that was pouncing on it one year ago and made for the memorable ride in gold at about the same time.

New York spot bullion markets traded near $1,280 in the first hour of action this morning, after the yellow metal was pushed to a new highs earlier ($1,284.40 was seen on the offer side of spot gold). Momentum trades lived to see another day as recent action has emboldened a few more participants to jump into the fray despite what some say is an after-hours party at this juncture.

Overbought conditions? Who cares, when you are about to receive yet another gift-wrapped present from the US Fed? Ignoring the potential key reversal pattern that was thought to have emerged last Friday? Just an integral part of the cocksure speculative behavior that brought prices to where they already are. Corrections more overdue than the arrival of certain ships from a voyage to the Bermuda Triangle? Nah, it’s all about one ship: QE2 (no, not THAT QE2).

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