FOMC Minutes to Still Support Gold

We heard several reports of central banks continuing to buy into the dip in gold three weeks ago, with amounts as much as four to six tonnes. The Reserve Bank of India and Russian Central Bank were notorious in their 2009-2010 interventions. A break in one of the biggest trendlines in financial markets may still be premature at this point, especially as Bernanke et al are in no hurry to depart hit the brakes. Today’s FOMC minutes (7PM GMT) may trigger some volatility in FX and metals as markets grow increasingly sensitive to Fed’s policy signaling following Operation Twist 1. Recall that immediately after release of the March 13 FOMC statement, the US dollar strengthened against most currencies and metals as the statement contained the following:

i) An upgrade of the Fed’s economic assessment by citing notable decline in unemployment and expecting “moderate” growth over the coming quarters (instead of modest);

ii) Stated that “increase in oil and gasoline prices will push up inflation temporarily”, despite expecting to run at or below the rate that it deems under its mandate.

iii) Contained a more vocal dissent from Richmond Fed President Lacker, who strengthened his opposition to the FOMC statement by saying he “does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014″, rather than simply disagreeing with the forward-looking language of the statement i.e. that conditions warrant exceptionally low rates until late 2014.

But any enforcement of these hawkish dynamics in the minutes will have only a short-lived positive impact on the USD. That is because last week’s Bernanke speech explicitly stated that more policy accommodation was required in order to prolong the improvement in labor markets. Bernanke said: “Further significant improvements in the unemployment rate will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies”.

Most Fed watchers agree that some form of quantitative easing is required beyond this summer. Whether it entails MBS purchases, and how effective their use will be in maintaining consistency with a new form of Operation Twist (no net new issuance), remains to be seen. Currency markets meanwhile, continue to subscribe to the notion that only outright QE from the Fed (increasingly unlikely) remains a key requirement for any notable gains in EUR/USD. Despite the unraveling challenges from Spain’s budget and the lack of clarity regarding the true size of the new and expanded Eurozone bailout fund, EUR/USD requires more bad news to break below $1.32 and ultimately break under 1.30. Friday’s release of the US March job report will have to deliver the continuing of good news demanded by the Fed.

Gold’s 100-day moving average extends its decline below the 200-day moving average for the first time since March 2009.  Metal remains well supported at the four-year trendline support, which currently coincides with a foundation of 1635-40. We heard several reports of central banks continuing to buy the dip in gold three weeks ago, with amounts as much as 4-6 tones. The Reserve Bank of India and Russian Central Bank were notorious in their 2009-2010 interventions. A break in one of the biggest trendlines in financial markets may still be premature at this point. Especially as Bernanke et al are in no hurry to depart hit the brakes.