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Gold Prices Settle Higher, Fed Unlikely to Halt QE3

Wednesday, January 30, 2013 4:05 AM
Gold prices settled higher on Tuesday after logging losses in previous four sessions as bullion’s inflation hedge bets received support from growing expectations that the Federal Reserve will not put its quantitative easing on hold while weaker dollar also lifted the demand for dollar-dominated commodities. Gold futures for February delivery edged up $7.90 an ounce or 0.5% to settle at $1,660.80 an ounce while spot gold gained around 0.5% to trade near $1,662 an ounce. On Monday, spot gold plunged to its 2 ½ week low level at $ 1,651.93 an ounce and gold futures slumped $40 or 2.4% in last four sessions. The SPDR Gold Trust (ETF) (NYSE: GLD) ended the day 0.44% higher at $160.99. The Federal Reserve began its two-day monetary policy meeting on Tuesday and on Wednesday it is expected to announce its policy statement.  Even though there was growing fear that the Fed might curtail or scale down its current economic stimulating measure or QE3, many experts envisage that the central bank will continue to purchase $85 billion assets purchases from the financial markets. Earlier in January when the Federal Reserve released minutes from its last FOMC, it showed that several top policy makers were extremely edgy over central bank’s unprecedented asset purchase program. This led to speculation that Fed will now be in hurry to close its QE3, weighing on bullion’s hedge appeal.  Series of some better-than-expected economic indicators also put the pressure on prices since Fed’s current QE is closely tied to the improvement in the U.S. economy and labor market. However, experts believe that Federal Reserve will be reluctant to halt its asset purchase program for the time being as unemployment level, which was steady at 7.8% in January, is not likely to fall to level desired by the Federal Reserve. Back in December, the Federal Reserve pledged to support the economy with its economic stimulating measures until the unemployment level drops to 6.5%, provided inflation remains under control. “What's going to come out of the Fed is more of the same, so we can just anticipate that (quantitative easing) is here at least for a little while longer,” wrote Jeffrey Sica, chief investment officer of SICA Wealth, who manages more than $1 billion in client assets, in a note to investors. Echoing the sentiment, David Morgan, publisher of investment newsletter the Morgan Report, said, “The most knowledgeable precious-metals traders expect a renewed commitment at the Fed to continue asset buying,” added Morgan. That means more QE for the indefinite future, which is long-term bearish for the U.S. bond market and “theoretically positive” for gold.” Nevertheless, Morgan believes that Fed’s policy statement will not spark off any rally in the bullion market as investors have already factored in the fact that QE3 will stay for now. On Tuesday, bullion was also supported by weakness in the U.S. dollar. The ICE dollar Index, a gauge on U.S. unit’s performance against a basket of six major traded currencies, fell to 79.582 on Tuesday, from 79.790 in late North America trade on Monday. Nonetheless, gold prices are down 0.9% YTD while platinum group metals have rallied due to improving industrial activities around the world. “Arguably, the current macro sentiment is more upbeat than at any point since the 2008 crisis, denying bullion its traditional safe-haven properties,” said Andrey Kryuchenkov, analyst at VTB Capital in London, in a note to investors. Moving to some other precious metal markets, silver futures for March delivery gained 40 cents an ounce or 1.3% to close at $31.18. Platinum for April contract tacked higher $16.70 an ounce or 1% to end the day at $1,678.90 while palladium futures of March delivery jumped $9.20 an ounce or 1.2% to settle at $749.75.

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