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Fed Meeting and Strong Equity Market Weigh Heavily on Gold

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U.S. equities closed solidly higher today, continuing the risk-on environment that has been prevalent in the marketplace. The Dow Jones closed up 63 points, with the S&P 500 as well as the NASDAQ closing moderately higher on the day. This, coupled with the upcoming FOMC meeting which begins tomorrow, has resulted in sharply lower pricing in precious metals with the exception of palladium.

Although it is widely anticipated that the Federal Reserve will not initiate another rate hike this month, they are expected to begin a period of “quantitative normalization” in which they will begin to liquidate part of their $3.7 trillion of assets. These assets were accumulated during the Fed’s “quantitative easing” program in which they collected trillions of dollars in mortgage securities as well as bonds to end the recession and fiscal crisis that began in 2008.

The Fed has announced a basic timetable and monetary caps to the quantity liquidated each month. There is, however, a tremendous amount of uncertainty surrounding the net effect of this liquidation. Commonly referred to as a “stealth rate hike,” the asset liquidation from the Federal Reserve’s balance sheet will affect the basic supply side of the assets they are selling.

By affecting the supply side of the bond market as they begin to liquidate their bond based assets, they will effectively drive interest rates higher. The question is: by how much? As this is the first time in history that the Federal Reserve has accumulated this massive portfolio, it contains inherent uncertainties as to how profoundly it will affect interest rate prices.

Strong selling has resulted in gold trading sharply lower, currently off a full percentage point today. As of 4 o’clock EDT, gold futures are trading down $13.30 at $1311.90. Spot gold is also trading under pressure today, currently off by $11.30. According to the Kitco Gold Index (KGX), today’s lower pricing is predominantly based on sellers in the market, with only $2.40 of today’s drawdown attributable to a strengthening U.S. dollar. The remaining $8.90 is directly attributable to traders bidding down the precious yellow metal.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer