Gold News

Gold Drops 2.6% as Fed Disappoints Bond Market, Cheers Dollar, with "Mere" 75-Basis Point Cut to Interest Rates

From Chris Mullen at GoldSeek.com...

Gold Prices closed New York trade above $1,003 per ounce on Tuesday, a little more than $1 to the good from Monday’s finish, before sinking 2.6% to a four-session low after the US Federal Reserve surprised both the metal and bond markets by cutting “only” 75 basis points off the cost of borrowing Dollars.

The Federal Reserve also cut the discount rate it charges to Wall Street commercial banks by the same amount to 2.5%.

The Dow had rallied as much as 300 points in morning trade and the Nasdaq and S&P followed suit on better than expected earnings reports from Lehman Brothers and Goldman Sachs. That eased the financial worries raised by Bear Stearns the past week.

All three indices then pared their gains following the Fed’s statement, but they soon rose to new highs on the day and ended with over 3% gains.

Ben Bernanke’s team noted that inflation has been elevated and uncertainty over the inflation outlook has increased, but they also said they expect it to moderate over coming quarters. The financial markets remain under considerable stress, the Fed’s policy announcement went on, and downside risks to growth still remain.

It seems the Fed is more concerned than the bond market gave it credit for about inflation, and the 10-year Treasury price fell in anticipation while the yield rose 13 basis points all told after the US central bank failed to deliver the 100-point cut widely expected in the bond pits.

Silver prices had already dropped 1.7% by the New York close before falling further on disappointment with the Fed’s move. Silver moved to a 2% loss in after-hours access trade, while platinum took its losses for the week so far nearer 4% with another $20 loss per ounce.

Gold and silver equities traded just slightly lower in morning trade, but they then steadily sold off after the Fed’s statement and ended with roughly 4% losses.

The Gold Price in Euros fell to about €624 before regaining €629 per ounce for a loss of 1.9% from the lunchtime peak in London trade. Copper gained nearly 6 cents to about $3.77.

The Fed Committee voted 8-2 in favor of the 0.75% cut, with governors Plosser and Fisher dissenting and calling for a smaller cut due to inflation concerns.

The US Dollar index rose markedly after the Fed cut, but crude oil had earlier surged by more than $3 per barrel.

US Producer Price Inflation came in as expected for Feb. with a 0.3% increase, but stripping out the “volatile” food and energy elements, so-called “Core PPI” jumped 0.5% from Jan., showing that price pressures have moved into the broader basket of goods and services.

There are no major economic reports scheduled Wednesday.

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Adrian Ash

Adrian Ash, BullionVault Gold News

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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