Gold on edge waiting for Fed meeting

In the Lead: “Let’s Do The Twist (and Shout the Buffett Rule)”

Metals prices were initially only slightly weaker as the markets opened for the new trading week in New York this morning. Gold lost $1.20 on the open to trade at $1,811 the ounce on the bid-side, while silver fell 55 cents to start Monday’s session off at the $40.11 mark. The white metal later lost nearly 3% as the selling spree that took over all markets pushed it to $39.52 per ounce. For gold, the maintenance of the $1,800 level was still a priority lest it risked heading back towards the $1,770’s and/or lower given the market’s speculative positioning metrics (described further below).

In fact, gold’s Friday gains evaporated fairly promptly in the mid-morning as the metal hit a shoal of unanticipated selling and ran aground; all the way down to the $1,775 area. Traders blamed the slide on the resurgence of the “sell everything” (but the dollar) syndrome that funds have regaled us with every so often. The gold perma-bulls quickly cited the purchasing of…800 kilos (not a misprint) of gold by central banks as a momentous new event in the annals of gold’s history.

Yes, but the contrarian argument about central banks basically doing the opposite of what they ought to normally do, still applies. We cannot have it both ways and declare that central banks are behind the curve on every policy step and agenda issue but when it comes to the issue of how they and why they buy or sell gold. See one Gordon Brown, circa last century…

Platinum first declined $9 to the round $1,800 figure and then to $1,776 (once again, it is cheaper than the yellow metal) and palladium slid $11 to the $719 level per ounce and then to $709 later on. In the background, the US dollar was up 0.16 on the trade-weighted index with a quote at 77.25 while black gold slipped $2.18 to the 85.78 level per barrel.

Stocks in Asia and Europe fell this morning and the S&P futures were indicating that a similar fate was likely awaiting the US markets on Monday. Recall that the S&P 500 had posted its best weekly performance since 2009 just last week. In fact, the Dow sank by 163 points pretty much out of the market’s starting gate this morning. The week ahead is once again shaping up as being as volatility-laden as recent ones have already been, and perhaps more so. Treasuries, oil, gold, the dollar might all be buffeted by…one Mr. Buffett and his “rule” as well as what the Fed might have to say about the new dance it plans to possibly adopt: it’s called “The Twist.”

Ah, the Fed! What would the news outlets (and speculators) do without it? Well, their prayers for fresh stories will be answered this very week as it turns out. The US central bank meets over two days, starting tomorrow. Rumor has it that in addition to a new possible agenda of setting targets (!) for unemployment and for inflation (the former is quite the non-mandated and novel preoccupation for the Fed) the Fed’s Board is also considering dancing “The Twist.” The maneuver involves the possible unloading of short-dated assets and their replacement with longer-dated ones.

Quite the dance, this one could be. In fact, it could become the US dollar’s victory dance, contrary to the “conventional” wisdom that sees every Fed meeting and every Fed action as the imminent reason to start making funeral arrangements for the greenback. The fact that there will be no QE3 is not the cause for the dollar’s morticians to fear the upcoming meeting. It is, however, the fact that “The Twist” might make for higher short-term yields and also obviate the need to further bloat the Fed’s balance sheet with more assets (seen by some as de facto dollar-printing) is what should keep the dollar alarmists up at night right about now. Fear not; they remain blissfully pessimistic about the US currency’s prospects, even as we speak.

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