Fed action steadies dollar, hitting gold, says Sharps Pixley

UK precious metals trader Sharps Pixley points to market reaction since the latest Federal Reserve monetary policy committee meeting as the reason the short-term gold price has weakened slightly this week.

Comex April Gold futures price was trading +/- $10 around $1,700 since the conclusion of the Greek PSI last Friday but declined intra-day by 2.5% from peak to trough after the Fed concluded its FOMC meeting on 12 March. Gold declined 0.3% for the day at $1,694 but is up 8% this year. The Fed maintained that borrowing costs would be kept “exceptionally low” through late 2014 but provided no hint to further asset purchase program. Gold price already plunged 4% on 29 February when the Fed did not offer any QE3.

While the Fed is still cautious about their economic outlook, analysts have picked up some hints of optimism as the Fed mentioned that unemployment rate has declined “notably” while upgraded their economic growth outlook over the next few quarters to “moderate” from “modest” in the previous statement and indicated no change in their inflation outlook.

S&P ended up 1.8% while VIX, the “fear index”, plunged almost 14% in the first 2 days of the week indicating a much improved investor sentiment which no doubt is helped by the FOMC statement and the late day release by the Fed that 15 out of 19 US largest financial institutions can maintain their capital requirement in an even more stringent stress test.

Investor flows have recovered strongly this year for commodities in general. Bloomberg reported the more than doubling of the combined bullish positions of fund managers/traders across 18 commodities futures and options since December 2011, based on CFTC data for the week ending 6 March. Nevertheless, net speculative long positions for gold declined 22% during the week while risky assets rebounded afterwards due to better U.S. payroll data and reduced chance of a messy Greek default. Investors keep pouring into Gold ETPs which now hold a record 2,408 metric tons in gold.

Gold price continues to be hampered by dollar strength and reacts violently to the central bank’s actions. However the longer-term fundamental picture for gold has not changed either – central banks have either stopped selling gold or diversified their reserves further into gold and supply remains constrained in the face of rising demand.

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