Gold in Pounds Sterling Briefly Hits Four-Month Low, America’s “Fiscal Cliff” Means Federal Reserve “May Need to Ease Again”

Gold in Pounds Sterling Briefly Hits Four-Month Low, America’s “Fiscal Cliff” Means Federal Reserve “May Need to Ease Again”

SPOT MARKET prices for gold bullion traded steady Thursday morning, around $1650 an ounce during London’s morning session – slightly higher than where they started the week.

“[Gold] trend line support is seen at $1627 on the weekly chart,” says the latest technical analysis from Scotia Mocatta.

“A close below this level on Friday will bring in liquidation selling of stale long gold positions.”

Gold prices briefly touched $1627 per ounce on Wednesday following the latest Federal Reserve interest rate decision, before rallying to touch a one-week high at $1653 this morning.

The gold price in Sterling meantime briefly hit a four-month low at £1008 per ounce following Wednesday’s Fed decision, before it too bounced back higher.

Silver bullion meantime failed to break above $31 per ounce – remaining around 3% down on the week so far – while stocks and commodities were also broadly flat as markets digested the latest statements from US policymakers.

In its official statement yesterday, the Federal Open Market Committee reiterated its view that economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014”.

The Fed however published projections showing that only four FOMC participants expect that the appropriate rate at the end of that year will still be 0.25% or below, compared to six when projections were last published back in January.

By contrast, ten of the seventeen participants expect the appropriate rate at the end of 2014 will be 1% or above – up from eight in January.

“The Fed’s interest rate forecasts,” writes Robin Harding at the Financial Times, “are getting the bank into a real bind.”

Harding points out that Bernanke defined “exceptionally low” rates as “close to where we are now”, meaning the FOMC statement is at odds with participants’ projections.

“The result is a complete mess,” writes Harding.

“This confusion undermines the cause of greater transparency that Mr. Bernanke has worked so hard to advance.”

“Strains in global financial markets,” adds yesterday’s FOMC statement, “continue to pose significant downside risks to the economic outlook.”

This was identical to the phrase used in March’s statement, with the exception that this time the FOMC did not say these strains have eased.

The US economy meantime needs to add between 150,000 and 200,000 jobs each month to meet fed forecasts, Fed chairman Ben Bernanke told a press conference following the interest rate announcement.

America’s economy is facing a “fiscal cliff” at the end of this year, US Treasury secretary Timothy Geithner warned Wednesday.

“The simultaneous expiration of tax cuts and large across-the-board cuts in spending… presents a risk,” Geithner said.

“If you try to restore fiscal balance without a penny of additional revenue, then you have to cut deeply – too deeply – into critical functions of government.”

“If Congress can’t respond to the prospect of much tighter fiscal policy,” says Steve Barrow, currency analyst at Standard bank in London, “then it may be up to the Fed again to cushion the economy through easy monetary policy.”

Here in Europe, “the soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalization of their funding channels,” European Central Bank president Mario Draghi told the European Parliament Wednesday.

“I consider it of crucial importance that banks strengthen their resilience further, including by retaining earnings and by retaining bonus payments.”

European banks borrowed over €1 trillion at the ECB’s two longer term refinancing operations in December and February, with Draghi saying it is “encouraging” that much of this money was borrowed by small banks as these “are best placed to refinance the real economy”.

In the UK, British bank Barclays on Thursday reported a 22% rise in first quarter pretax profits compared to Q1 2011.

Over in India meantime, early reports suggest there was a significant drop in gold buying for this year’s Akshaya Tritiya festival, which fell on Tuesday this week, compared to last year.

Gold bullion sales are estimated to have dropped by around 50% to 10 tonnes, newswire Reuters reports.

Ben Traynor

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

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