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Gold Prices Jump as Fed Votes Against QE Taper, Wall Street Soars, Dollar Sinks in "Risk-On Party"

UPDATE, 18:30 ET:
Gold prices leapt late Wednesday after the US Fed kept its quantitative easing bond buying program at $85 billion per month, defying long-building expectations it would "taper" QE at the September policy meeting.
 
"The unemployment rate remains elevated," said the Fed's monetary policy statement, a point repeated in chairman Ben Bernanke's press conference. "Mortgage rates have risen further and fiscal policy is restraining economic growth.
 
"Inflation has been running below the Committee's longer-run objective."
 
Already $20 per ounce above Wednesday's early 6-week low, gold prices jumped on the Fed's no-taper announcement, rising to $1361 for a gain of 5.3%.
 
Silver also leapt, jumping through $22 and then $23 per ounce to add 9.4% from its new 5-week low, hit just before the Fed announced it wouldn't be tapering QE as expected this month.
 
"It's a big shock, and it's a massive green light for a risk-on party," the Wall Street Journal quotes Benoit Anne, global strategist for emerging markets at Societe Generale, after New York stock markets ended the day at new record levels and the Mexican Peso jumped to 1-month highs.
 
Even as the US Dollar sank on the currency markets following the Fed's decision not to taper QE, gold prices for non-US investors also jumped, hitting £844 in Sterling and breaking back above €1000 per ounce.
 
By the end of New York trade, Dollar gold prices had reversed all of the last week's losses.
 
LONDON LUNCHTIME REPORT:
GOLD PRICES fell below $1300 for the first time in 6 weeks Wednesday morning in Asia, as traders in all markets awaited today's US Fed announcement on QE tapering.
 
Regaining that level in London – a record high when first reached 3 years ago next week – gold prices still held 7% beneath the start of September.
 
The US Dollar held flat meantime, as did US Treasury bonds.
 
World stock markets ticked up with commodities. Silver rallied 20c from an overnight low at $21.37 per ounce. 
 
"Any surprise [on Fed tapering] could push gold prices fiercely in either direction," says a commodity trading desk's note.
 
Longer-term, "Tapering really removes the upside case for gold," reckons UBS commodity analyst Daniel Morgan in Sydney, speaking to Bloomberg.
 
"I don't see any big reasons to be bullish on gold in the short term."
 
Going further, analysts at Societe Generale today say that "Rate hikes will follow tapering, markets are too complacent," in a new cross-asset strategy report.
 
Recommending 7 key trades, "Switch out of emerging markets and associated commodities," the French investment bank and London bullion market maker says.
 
"Sell gold now," SocGen's report adds, pointing both to Fed tapering and "lower sovereign risk from the Eurozone."
 
Shorter-term ahead of today's US Fed policy statement, "A large part of the market is already short in anticipation of [tapering], says David Govett at brokers Marex.
 
"[So] if no taper is announced, gold will shoot straight back up as all the shorts run for cover," Govett believes, forced to close their bearish bets at rising prices.
 
Surveys and economists' comments today put the consensus expectation for QE tapering at $10-15 billion, cut from the current level of $85bn per month.
 
"If this [proves] the case the gold price is unlikely to come under further pressure," writes Eugen Weinberg's team at Commerzbank.
 
"Of greater importance will be the way Bernanke steers the market's expectations of future monetary policy measures [in his 14:30 ET press conference]."
 
But "we tend to believe," counters a note from London market-maker HSBC, "that the bulk of gold declines based on tapering are already largely factored into current prices."
 
After an initial knee-jerk drop, "[only] a heavier tapering program on a more limited timetable could lead to a second-round of sales," its precious metals analysts say.
 
UK policy makers at the Bank of England voted 9-0 this month to keep their quantitative easing unchanged, minutes from the Sept. meeting showed Wednesday morning.
 
As recently as last month, some members of the committee had seen a "compelling" case for extending the current £375 billion in QE – now used to buy one-third of all UK government debt in issue.
 
"As monetary conditions normalise," reckons Kevin Gardiner, Barclays' chief investment officer for Europe, "[gold] investment demand is expected to weaken while physical demand growth from India will likely remain soft."
 
World No.1 gold consumer India yesterday saw import duty on gold jewelry raised to 15%, giving domestic manufacturers a price advantage as gold bullion duty stayed at 10%.
 
"[Such] bearish news articles doing the rounds have precious metal investors spooked," says analyst Moudi Raad at refining and finance group MKS in Geneva.
 
Looking at the broader natural resources market, however, "Commodities continue to provide diversification versus stocks and bonds," says a new article from portfolio managers Nicholas Johnson and Greg Sharenow at Pimco, the $2 trillion California-based bond and asset management firm.
 
"[Commodities] are also one of the most potent ways to hedge against unexpected changes in inflation."

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum 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 he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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