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Gold, Silver, U.S. Dollar, U.S. Economy, U.S. New Home Sales

Gold Climbing Back to $2,000 on News that Federal Reserve Vows to Keep Rates Low & Home Sales Fall


Oil rose to near $100 a barrel Thursday in Asia after the U.S. Federal Reserve said it would keep interest rates at record lows at least until 2014 to help jump-start the world’s biggest economy.

As we suspected yesterday, crude oil prices edged higher after an overtly dovish FOMC announcement sank the US Dollar. The move higher was muted by a pickup in inventories however, where the weekly build more than doubled expectations. Looking ahead, a mixed set of US economic data is ahead, with expectations calling for a slowdown in Durable Goods Orders but improvements on the composite Leading Indicators index and New Home Sales. However, the earnings calendar may prove most market-moving as a hefty dollop of industrials report results, with traders particularly interested in guidance from the likes of Caterpillar Inc as a proxy gauge of the global business cycle (and thereby oil demand prospects).

The U.S. central bank, which has kept its benchmark interest rate near zero for three years, said Wednesday that it doesn’t plan to raise the rate before late 2014.

That caused the dollar to turn lower against major currencies, which makes dollar-priced oil less expensive for holders of other currencies.

“That would mean the U.S. dollar would continue to be cheap versus other currencies, and there is typically an inverse correlation between the value of the dollar and commodity pricing,” said Victor Shum, an energy analyst at consultancy Purvin & Gertz in Singapore.

The median sales price for a new home fell 2.5 percent to $210,300 last month, the biggest drop in four months. Compared to December last year, the median price was down 12.8 percent.

There were a record low 157,000 new homes on the market last month and at December’s sales pace, it would take 6.1 months to clear them, up from 6.0 months in November.

Spot Gold (NY Close): $1710.57 // +44.90 // +2.70% 

Not surprisingly, gold soared after the Federal Reserve extended its pledge to keep interest rates at “exceptionally low” levels to the end of 2014 from the previously promised mid-2013. With the central bank determined to keep borrowing costs near-zero for the foreseeable future and recent US economic data pointing to a pickup in activity, inflation expectations are understandably climbing and boosting demand for the yellow metal as a store-of-value hedge. Indeed, the 2-year breakeven rate – a measure of inflation expectations derived from bond yields – soared to the highest in nearly 7 months after the FOMC outcome crossed the wires.

Spot Silver (NY Close): $33.16 // +1.12 // +3.49%

As with gold, silver prices soared higher after the dovish FOMC outcome stoked future inflation bets, with more of the same seemingly likely ahead. Likewise in line with its more expensive counterpart, the spotlight now turns to US economic data to see if positive momentum resumes or falters, with the latter scenario likely to defuse what will otherwise almost certainly amount to another major advance for precious metals. Prices are testing resistance in the 38.78-33.30 region, with break higher exposing 35.30. Near-term support lines up at 31.04.

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Discussion

4 thoughts on “Gold Climbing Back to $2,000 on News that Federal Reserve Vows to Keep Rates Low & Home Sales Fall

  1. Just thought i’d say thanks for liking the first chapter of my novel! Next ones up now. Keep up the good work with your site!

    Posted by mattymillard | January 29, 2012, 8:49 pm

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