"Gold Surges Past $1700 On FOMC, As Bernanke Says QE3 Still An Option"
forbes.com
The latest FOMC statement surprised many, suggesting the economic outlook faces significant downside risks and announcing interest rates would remain zero-bound for even longer than before, until at least late-2014. Gold, which jumped on the news, is poised to benefit from additional easing and the possibility of further monetary stimulus in the form of QE3.
Gold, which had traded in negative territory through most of the session, surged on the Fed’s statement. While few expected Chairman Bernanke to give markets a third round of quantitative easing, several asset classes responded to what can be seen as additional easing.
The yellow metal went from trading at an intraday low of $1,649.60 around 9.40 AM in New York to a peak of $1,712.90 an ounce by 3:56 PM. Rates on 10-year Treasuries plunged even further, trading down 2.8% to 2.01%.
A dovish Fed has proven to be a bullish catalyst for gold as of late. UBS’ Edel Tully noted a further extension of the time frame in which the Fed expects to keep rates in the 0% to 0.25% range is “likely to be considered as a form of easing in lieu of balance sheet expansion by most FOMC members.”
But the major factor will be “any clues that point toward additional stimulus.” Despite what many economists have agreed is a stronger than expected economic performance by the U.S., the FOMC statement retained its previous pessimism. Not only do unemployment rates remain high, “but growth in fixed investment has slowed and the housing sector remains depressed.”
The biggest risk to the anemic recovery, though, comes from aboard, particularly Europe. “Strains in global financial markets continue to pose significant downside risks to the economic outlook,” read the release.
Investors should keep their eyes peeled for the different projections for the Federal Funds rate. More importantly, though, was Bernanke’s post-FOMC press conference. The Chairman didn’t to rule out QE3, which should help fuel the rally in the yellow metal. Bernanke also said he considered beginning to tighten even farther down the road, guaranteeing ultra low rates until at least late 2014 and possibly putting further downward pressure on the U.S. dollar.
All three major U.S. equity indices responded favorably to the release. Investors were favorably primed by Apple’s stellar earnings, while McDonald’s recent results suggest the U.S. economic recovery continues.
Gold, which has see-sawed as of late, was one of the big winners after Bernanke’s press conference.
* A little round table discussion on CNBC
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