Gold following central bankers’ lead

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After the widely anticipated FOMC meeting on Wednesday, gold futures ended up down only $1.50 or -0.09%. Intra-day gold fell $15 to $1,625 after the FOMC policy statement was out, and then swiftly rebounded to $1,650 and settled at $1,642.3. Gold futures rose $18 to 1,660.5 on Thursday but fell to $1,656 on Friday Asian morning after S&P cut Spain's credit rating to BBB+ because of Spain's worsening fiscal trajectory. S&P rose 1.7% and the Stoxx was up 3.4% in the past two days.

There still is no imminent QE3; however, gold did not plunge, but actually went up this time. What has seemingly cheered the gold market?

In sum, Bernanke is still cautious as the statement says interest rate will be kept low at least until late 2014. While the Fed upgraded the U.S. economic growth and unemployment outlook for this year, they lowered economic growth in 2013 and also viewed that the unemployment rate was not declining fast enough to the long-run rate of 5.2% to 6%. With the economy moderately improving, the Fed is not willing to do more policy easing now but is prepared to do more to meet growth and inflation target and leave bond purchasing option on the table. Why? Because U.S. fiscal tightening towards year-end and the sovereign crisis in Europe will dampen the US economic growth outlook. In Japan, the BOJ Governor increased monetary stimulus on Friday by stepping up bond purchases and extending maturities as economy is not doing so well. Dovish central bankers are good for gold.

Gold traders are getting more bullish and expect price to rally next week, according to Bloomberg, as the IMF data showed at least twelve central banks bought an estimate of 58 tonnes of gold in March. Central bankers see gold as a safer alternative to fiat currency.

While the Fed is watching for any signs of U.S. unemployment or European debt crisis to deteriorate before launching QE3, gold is likely forming a bottom. With the speculative net long positions being about 56% below that of August's peak, gold price has plenty of room to rally, says UBS' Edel Tully. The next FOMC meeting in June 19 to 20 could be one of the most exciting events to watch in 1H 2012.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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