Fed statement may let gold continue upward course

By Allen Sykora
The Wall Street Journal
Wednesday, November 4, 2009

http://online.wsj.com/article/SB125737211967428993.html

Federal Reserve officials did not offer any hints Wednesday on when they might start to tighten monetary policy for the foreseeable future, which may well mean a green light for further gains in gold.

Analysts said there were at least some concerns ahead of time that the Fed language might have changed just enough since the last meeting to be seen as the first sign that policy-setters might start tightening down the road as the economy improves.

But this did not happen, they said, with the statement after a two-day meeting saying conditions "are likely to warrant exceptionally low levels of the federal funds rate for an extended period" of time.

"The Fed inaction allows gold to continue on course," said Dave Meger, director of metals trading at Vision Financial Markets.

The Fed statement may mean many traders will remain bullish in gold, plus equities, for the rest of the year, said Adam Klopfenstein, senior market strategist with Lind-Waldock. He suggested it now may be the middle of 2010 before policy-setters start to seriously consider hiking rates.

"The Fed is still a little timid about raising rates in the short run," he said. "That indicates the bullish case for owning gold is still there."

Continued low rates help gold two ways, explained Joe Foster, portfolio manager with Van Eck International Investors Gold Fund.

"I don't think they have intentions of reining in their liquidity anytime soon," he said. "It's negative for the dollar for the Fed to continue with these policies at the same time other regions in the world are starting to show growth."

The central banks of Norway and Australia have hiked interest rates recently, while the Federal Reserve maintains its accommodative stance. Thus, a widening interest-rate differential may weigh down the already weak greenback further.

"Anything that is negative for the dollar is good for gold," Mr. Foster said.

Furthermore, if the Fed keeps rates at historically low levels for a longer period of time, this increases the potential for inflation further into the future, Mr. Foster said. Investors often buy gold as a hedge against inflation, as well as dollar weakness.

Problematic inflation in the U.S. may not kick in yet for a while as the economy and joblessness remain high, Foster said. It could be 2011 or 2012 before the inflation bogeyman rears his head.

"You'll see the credit markets and commodities markets react to that before we actually see inflation in the CPI [Consumer Price Index] numbers," Mr. Foster said.

Meanwhile, other constructive factors for the gold market remain at play, Mr. Meger said. This includes producers unwinding hedge books sooner than previously planned, expectations for strong investment demand for gold, technical momentum and weakness in the dollar.

Roughly an hour after the FOMC statement, December gold hit a high of $1,098.50 an ounce in electronic screen trading, a record for a most-active contract on the Comex division of the New York Mercantile Exchange.

"Between now and year-end, it wouldn't surprise me to test $1,200," Mr. Foster said.

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