If anybody thinks that history is not repeating, he
should have a look at the recent FOMC meetings and those in 2008. The
similarities are striking. Last Wednesday, the FOMC decided to lengthen the
duration of the holdings in US Treasuries but not to increase the volume of US
government bonds on its balance sheet. This is called “operation twist” and has
been widely expected by financial and commodity markets. However, the statement
issued after the FOMC meeting caused more damage than operation twist is
probably able to be beneficiary for US GDP growth. Also back in 2008 during the
financial crisis, the Fed implemented many measures; even some innovative ones
being appropriate to tackle with the crisis, however, the statements of the
FOMC or from individual members of the FOMC were counterproductive.
It is probably both, the Fed and the markets, being to
blame for the turmoil in markets following the FOMC statement last week. The
Fed has not learnt the lessons from mistakes made in 2008 that words sometimes
speak louder than actions and that monetary policy could be ineffective if
statements of central bankers have a negative impact on the mass psychology in
markets. The financial markets were already highly concerned that the US
However, also financial and commodity markets are to
blame for overreacting. One could not expect that the FOMC decides on
implementing further measures to prevent a recession of the US
Increased fear of a global recession pushed stock
markets lower. But also base metals got hammered. Copper, which is especially
sensitive to business activity, lost more than 15% compared to the preceding
week. Lead and tin lost even more as rising inventories contributed to pressure
on prices.
Gold could not live up to its reputation of being a
safe haven in times of turmoil in stock markets. Last Friday, gold suffered its
worst one day plunge by falling more than 100$/oz. Compared to the previous
week, gold lost 8.6%. Other precious metals with a higher share of industrial
demand suffered stronger percentage losses and silver was again the most
volatile among the precious metals. Also the situation in the precious metal
markets is similar to fall 2008.
Two factors are at work, which push gold lower. First,
investors sell assets across the board. To some extend this selling is driven
by the intention to prevent capital and to keep losses from widening. However,
some investors also sell assets to realize profits needed to compensate losses
suffered with other investments. Gold is very likely being sold to a large
extent for the second reason, i.e. to realize profits. The second factor is the
US dollar. Investors not only sell assets in times of financial turmoil, like
in 2008, however, they also repatriated funds invested abroad back into US
dollars. Thus, the US dollar strengthened despite further Fed monetary easing
measures. The US dollar index rose 2.5% over the week. The firmer US dollar is
another reason for investors to sell also the precious metals.
Even before the FOMC statement was released, large
investors have reduced their gold holdings further. According to the latest
CFTC report on the Commitment of Traders, non-commercials have reduced the net
long position in COMEX gold futures by another 18,318 contracts to 150,529 contracts
in the week ending September 20. We would not be surprised to see another drop
in the report for the week ending next Tuesday.
Whether gold will continue to trade lower probably
depends to a large extend on the further movements in stocks and forex markets.
A crucial role for these markets will be the developments of the eurozone debt
crisis and the economic figures released during the week. Especially, if the
situation in the eurozone gets worse, it could be a double whammy for gold and
other precious metals. Therefore, it could not be ruled out that gold enters
also bear market territory after falling already more than 15% from the record
high.
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