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Gold Prices Rise Before Fed as Yen Defies Bank of Japan's Urgent New Inflation Plan

GOLD PRICES rose sharply against all major currencies except the Yen on Wednesday, touching 1-week Dollar highs ahead of the US Fed's long-awaited September decision on interest rates as world stock markets rose after the Bank of Japan removed all time limits on its QE money-creation scheme and vowed to push inflation above its 2.0% target.
 
Chinese gold prices fixed higher on quiet volume before the Dollar price hit almost $1330 per ounce in London trade.
 
Silver prices rose faster, adding almost $1 per ounce from last Friday's finish to hit 2-week highs of $19.72, as crude oil rallied for a second day, pulling broad commodity indices 0.8% higher against the Dollar ahead of the US Fed's announcement, due at 14:00 Washington time (UTC -4).
 
Leaving its deposit interest rate at -0.1% and keeping QE asset purchases at ¥80 trillion per year ($780bn), the Bank of Japan on Wednesday said this summer's "comprehensive assessment" of policy has led to a new regime of "Quantitative and Qualitative Monetary Easing with Yield Curve Control".
 
Specifically, it will target keeping 10-year government bond yields at zero per cent while easing the rules for which other assets to buy at what prices, and removing all time-frames for ending its QE program.
 
The Bank also made a new "commitment to overshooting" its inflation target of 2.0% per year, vowing to "expand the monetary base...to shift peoples' entrenched deflationary mindset...at the earliest possible time."
 
Tokyo's Topix stock index jumped 2.7% while Japanese government bond prices fell, briefly pushing 10-year JGB yields above zero for only the second time in 6 months before they retreated to offer new investors -0.04% per annum.
 
Gold priced in Yen initially jumped 1.6% as the Japanese currency weakened on the FX market.
 
But gold bullion for Japanese investors then retreated as the Yen swiftly reclaimed that drop, and the Dollar fell to new 4-week lows at ¥100.
 
New data today said Japanese exports fell almost 10% per year in August, the 11th consecutive monthly decline.
 
Chart of USD/JPY on 21 September 2016 from HIFX
 
"The Bank of Japan [is] seemingly gambling on the idea that US Treasury yields will rise as the Fed tightens policy," says a note from Chinese-owned ICBC Standard Bank's FX strategist Steven Barrow.
 
"So its decision to anchor 10-year JGB yields at zero could prove a masterstroke...potentially a clever way for the BoJ to lift dollar/yen while not falling foul of G20 accusations that it is engaged in currency manipulation."
 
The Bank of Japan's inflation target "overshooting promise [in contrast looks] somewhat odd," notes University of Birmingham economics professor Tony Yates.
 
"No new [policy] instruments. Why should new higher target work when old one not hit?"
 
Ahead of the Fed decision meantime, "Support [in gold prices] is at $1306," says technical analysis from Russell Browne at bullion bank Scotia Mocatta's parent Scotiabank, pointing to the 100-day moving average of the gold price, "while resistance is at 1333 (50 day MA).
 
"The metal appears to be consolidating within this range over the last 7-8 days. Momentum has picked up slightly."
 
"Within [gold's recent] mildly descending channel," says Stéphanie Aymes, head of technical analysis at French investment and London bullion market-making bank Societe Generale, "[the] lower limit at $1307/$1300 remains a key support area", marking the neckline of an inverted head & shoulders pattern identified earlier in 2016's strong gold price rally.
 
Below the gold price's pre-Brexit high of $1297 "[sits] the 2016 uptrend [now] at $1266 which protects key support at $1200-1192," notes weekly technical analysis from German financial group Commerzbank.
 
But with the metal now "comfortably back above the major support zone of $1300-1305," says a trading desk note from Swiss refiners MKS Pamp, "markets [are] continuing to gear up for what will likely be some marked volatility" around the Fed announcement.

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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