FOMC might be negative for precious metals again

Precious metals are still consolidating. However, given the reaction of financial and commodity markets following the release of the FOMC statement in March, the risk appears to be biased on the downside the new week. The Fed might disappoint again expectations of providing hints for the implementation of QE3 at its two day meeting of the FOMC on April 24 and 25.

The major fundamental drivers had been positive on balance for precious metals this past week. Compared with the close of the preceding week, the US dollar weakened and the S&P 500 index as well as crude oil posted a gain. However, the moves during the week were rather mixed. Thus, it is not surprising that gold and platinum ended the week lower while silver and palladium managed to close higher, just the opposite of the previous week.

The debt crisis in the eurozone plays still an important role, but gold could not profit. The bond vigilantes expect the impossible that Spain should implement austerity measures to reduce the budget deficit and should prevent a further slow-down of economic activity. Some academic studies pretend to show that it would be possible to follow a restrictive fiscal policy and to have a growing economy. However, those empirical studies are based on cases were the fiscal austerity was pursuit to reduce inflation and not to cut the budget deficit. Nevertheless, fixed income strategists complain that either Spain would not cut spending enough to reach the target for the deficit/GDP ratio or Spain would shrink stronger than expected. Therefore, whatever measure the Spanish government is taking, there appears always a reason for a negative comment from fixed income strategists in the City of London.

There appears to be a competition among fixed income strategists and traders to have the most negative comment on Spain in media reports – in some cases, it could also be the most stupid one. An example has been the comments on the Spanish auction last week. Spain managed to sell short-term paper which met good demand. This had calmed the tensions and the yield on 10yr Spanish Bonos declined again below 6%. Two days later, an auction of those 10yr Spanish bonds went also well as Spain could sell slightly more than the maximum target of 2.5bn euro. Also the bid/cover ratio pointed to strong demand for the 10yr paper. The yield accepted was 5.74%. However, immediately after the auction, Spanish bonds had been sold heavily. Traders and strategist were not satisfied that the yield was higher than at the preceding auction. This is a rather stupid comment given that the yield of 10yr Spanish government bonds was at 6.14% at the beginning of last week. If traders regard the accepted yield as too high, why did they push yields up so much?

The favorite trade among hedge funds is currently long 10yr German bunds and short eurozone periphery. John Paulson appears to be the lonely wolf among hedge fund managers being short in German government paper. Thus, it is not surprising that many comments from traders and strategists have a negative bias on the eurozone periphery and Spain in particular. However, some traders even manipulate the financial markets by spreading false rumors. Obviously, the gains of the German Bund following the Spanish auction on Thursday were not enough. Thus, the rumor was spread around that Moody’s would downgrade immediately France. This rumor had a negative impact on the euro and on stock markets. Thus, also precious metals were pulled lower by this market manipulation by some criminals. The shame is that no market supervising authority is taking any action against those gangsters despite the fact that market manipulation is a crime in most jurisdictions.

US economic data has been mixed lately, at least compared with the consensus forecast of Wall Street economists. We pointed out that economists’ forecasts get too bullish after they have underestimated monthly economic data for some time. We are currently in that phase that economists adjust their forecasts upwards. Furthermore, moveable holidays like Easter could have a significant impact on monthly figures, which could not be eliminated by the usual seasonal adjustment procedures. Quite the opposite, the seasonal adjustment could even exacerbate the distortions. The economic data indicates that US GDP growth might have slowed down somewhat towards the end of the first quarter. However, there is not yet a clear picture. And one month of a disappointing number of new jobs created is not enough evidence that the economic situation worsened considerably, in particular as the unemployment rate declined. The ISM purchasing manager indices still point to economic expansion. Thus, we expect the FOMC to keep the powder dry and to provide no hint of embarking on QE3.

The US Treasury market has rallied on hopes of QE3. Thus, we expect a stronger negative reaction after the release of the FOMC statement. This alone would be a positive factor for precious metals. However, at the same time, the US dollar might strengthen and stock markets might react negatively. This could lead to falling prices of precious metals after the FOMC meeting.

Therefore, the ongoing eurozone debt crisis and the FOMC meeting are factors that bias the risk for precious metals to the downside. Gold might test again the support around the 1,600$/oz level.