Gold and Silver Remain on their High Perch after QE3

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Markets remained relatively calm during the day yesterday and base metals moved between gains and losses. Silver and gold eked up slightly ahead of the FOMC.

From the economic data front, the US producer prices increased supporting gains while the weekly jobless claims continued to pose a threat to the economic situation and weakened metals pack. However, at the end of the trading day, the Fed announced to extend extremely low interest rate of 0-0.25 percent till mid-2015. The Fed also decided to introduce QE3 measures from September 15 and buy $40 billion of agency mortgage-backed securities (MBS) each month, in addition to maintain its existing Operation Twist. The Fed’s purchases of MBS and the so-called OT meant that it would be adding roughly $85 billion of long-term securities each month through the end of the year. The Fed would continue MBS purchases, implement further asset purchases, and employ other policy tools until the labor market improves. New agency MBS purchases are expected to start from September 14, and the purchasing scale may reach $23 billion in September. The central bank’s unconventional debt buying action is directly associated with economic situation, suggesting the Fed’s clear change in monetary policy directions. Markets were pleasantly surprised when Mr. Bernanke pulled out the big bazooka. Many say that the new programs went beyond expectations.

In response, the financial market rose rapidly and the metals pack surged 0.6 to 2.15 percent. The Fed’s move will influence global monetary policies over the long run, and China’s central bank may become the first to adopt further stimulus measures. Gold and silver have climbed to six-month highs. Gold for September delivery gained $38.50, or 2.2 per cent, to settle at $1,769.10 a troy ounce on the Comex division of the New York Mercantile Exchange, the highest settlement since February 28. The September silver contract rose 4.5 per cent to settle at $34.716 a troy ounce, the highest since March 1.

On similar note, base metals are trading up by nearly 1% at LME along with the Asian equities.  Due to possible inflation worries precious metals may continue to register growth coupled with increased easing by the central bank.

The retail sales and industrial production is likely to remain close to forecast while the business inventories may slight stockpile due to lower consumer demand. However, overriding all releases, base metals are likely to brace the Fed’s QE and on optimism, that the other nations may follow increased easing soon may continue the gaining momentum in metals.  Markets are hoping to hear news from China and possibly from Japan at the BoJ meeting on the 19th. 

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About: FX Empire Analyst - Barry Norman

Barry produces a private Daily Market Review newsletter that is distributed around the globe to over 25,000 subscribers and recently published a book on Options Trading that is available from amazon.com

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