Fed, Elections to determine Metals market path next week

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31 Oct 2010

Next week brings several key events that can drive precious metals prices in the short and long-term: the U.S. mid-term elections and Federal Open Market Committee meeting.

Further, the European Central Bank, the Bank of England and Bank of Japan will all have their own monetary policy meeting, giving metals traders plenty to digest in a week. Through it all, the direction of the dollar will guide market activity.
Gold prices have come off their recent highs as the dollar has rebounded. December gold on the Comex division of the New York Mercantile Exchange settled at $1,357.60 an ounce, up 2.45% on the week. December silver settled at $24.564 an ounce, up 6.26%
Ron Coby, co-founders of Coby Lamson Capital Management and a commodity trading advisor, said the dollar could be getting ready to set a bottom, and if that is the case, many financial markets – precious metals included – will reverse. “We don’t have any signals yet, but we’re set up for it. If the Fed does not deliver what the market is expecting next week – or even if they do – we think there will be selling on the news, sort of a ‘buy the mystery, sell the history’,” he said.
Coby said he’s bullish on gold, but said the market could see a pull back because so much anticipation of quantitative easing by the Fed at the end of the Nov. 3 meeting is priced in. “We have hedged all of our longs. We’ve cut back to a core position in gold. Anything can happen, so we want to see how the market reacts,” he said.
Tom Pawlicki, analyst at MF Global, said ahead of the U.S. election and the FOMC meetings next Tuesday and Wednesday, respectively, gold prices will likely keep a rough trading range of $1,315-$1,350. “Pressure will come from the possibility that the new Congress focuses on spending reductions, the likelihood that the FOMC conducts a smaller QE2 package than anticipated,” he said.
Barclays Capital said they expect the FOMC to issue a second quantitative easing round and announce $100 billion of asset purchases per month while the Bank of England and European Central Bank remain on hold. “We think the FOMC's announcements will disappoint the market and that the ECB and BoE decisions will be broadly in line with market expectations,” they said.
Regarding the election and the impact on the dollar, if the Republicans take the House and reduce the Democrat majority in the Senate, it would be in line with financial market expectations and have little dollar impact. Barclays said ultimately the impact on the dollar is likely to be the same whether there are more Republicans in Congress or a continued Democratic majority. “The increased appetite for tax cuts (will mitigate) any long-term dollar gains from proposed spending cuts…. Any potential decline in fiscal deficits from the partial expiration of the Bush tax cuts (will be mitigated) by the greater probability of a new fiscal stimulus bill,” they said.
Gold Core said if the Republicans do make gains in Congress, generally it hasn’t favored the yellow metal. “Gold has performed better during periods of Democratic power as they have traditionally been less fiscally conservative than their Republican rivals. However, in recent history, Republicans under George Bush spent money in a manner that would make a drunken sailor proud. The fiscal challenges facing the U.S. are of a magnitude that no matter which party comes out on top in next week's mid-term elections, gold is likely to remain robust for the foreseeable future,” they said.
Leonard Kaplan, president, Prospector Asset Management, said elections aside, gold and precious metals in general will stay supported as long as interest rates remain low. “When China raised their interest rates a quarter of a percent, gold fell $30. When the U.S. and Europe start to do this, prices will fall. But it might be years and years until that happens.”
Aside from the activity in the U.S., some support for gold could come from the beginning of festivals in India, Pawlicki said. Dhanteras takes place on Wednesday and Diwali is on Friday and Pawlicki said demand is expected “to be strong based on a favorable monsoon and high global prices for food commodities grown in India. Farmers should be flush with cash and able to take advantage of the recent drop in gold prices.”

Source: Kitco News