New York 04/04/2012 - Gold traders' dreams of unlimited monetary support from the Federal Reserve turned nightmarish after the US central bank all but pulled the plug on QE3.
Global markets turned sharply negative yesterday after the Federal Open Market Committee (FOMC) disclosed that it would only pump additional liquidity (QE3) into the US financial system if the economy “lost momentum” or if inflation seemed likely to remain below its mandate consistent rate of two percent.
“The large army of QE3 addicts is now facing the prospect of a period of cold-turkey,” London-based broker Triland Metals quipped.
Monetary accommodation is seen as unequivocally bullish for gold as cheap money tends to debase the dollar and create future inflationary risks.
Gold futures for June delivery on the Comex division of the New York Mercantile Exchange closed down $57.90, or 3.5 percent, at $1,614.10 an ounce on Wednesday.
“Gold liquidation continued throughout the day, breaking the key support level at $1,627 and inducing more stop loss selling. Bounces have been weak and as we approach the psychological $1,600 level the pressure on the longs increases,” said Triland, which added that the next major support after $1,600 would be all the back at $1,523.
The failure to hold above the trend-line, along with the absence of further excess Fed liquidity, leaves gold vulnerable to a deeper correction in the last session before the Easter holiday, MKS Finance SA said.
“However, [the lower prices] may entice some physical buying interest in the run up to Akshya Trithya [in India] later this month, while available ETF data suggests investors remain comfortable with their holdings,” said MKS, adding that the renewed Spanish debt issues could prompt some safe-haven demand.
Nevertheless, gold investors would be wise to concern themselves with more than just the absence of QE3, George Gero, vice president with RBC Wealth Management, said.
If the recovery continues to pick up speed, the Fed could be tempted to increase interest rates at the end of this year or next year, which would be anti-inflationary and put severe downward pressure on gold. In January, the US central bank pledged to keep rates exceptionally low through the end of 2014.
The sell-off Wednesday was not confined just to precious metals complex. Comex copper futures closed down 12.85 cents at $3.7905, while light sweet crude (WTI) oil futures on the Nymex were last at $101.78 per barrel, down $2.23.
In the wider-markets, the dollar was about a cent higher at 1.3141 against the euro, while the Dow Jones industrial average and S&P 500 fell by 0.84 percent and 0.91 percent respectively.
In news, payroll processor Automatic Data Processing (ADP) reported that the US private sector added 209,000 jobs last month, beating expectations of a 206,000 reading. Additionally, the February data was revised upwards to 230,000 from 216,000 previously.
Normally, base metals would react positively to robust employment figures but that was not the case this morning - this report makes QE3 even less likely.
Meanwhile, US car and light truck vehicle sales were at a seasonally adjusted annualized rate (SAAR) of 14.37 million in March, down 4.4 percent from the 15.03 million rate last month and missing the forecast of a 14.7 million SAAR. Even though sales came in below expectations, the automotive sector still managed to post its best quarter since the start of 2008.
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