Gold ETFs fell last week while the precious metal dropped below $1,600 an ounce as the Federal Reserve’s extension of ‘Operation Twist’ disappointed and investors look for the next round of quantitative easing, or QE.
It appears that most investors already expected an extension of the Fed’s Operation Twist, so when further easing was not announced last week following the FOMC meeting, the gold price and equity markets declined.
In the current environment, the main driver of the gold price appears to be perceptions of the likelihood of another round of QE, as gold is viewed as one of the few hedges against US dollar debasement. [Gold Surrenders $1,600 an Ounce]
Statements by key FOMC members make it clear that the Fed is carefully watching for further signs of slowing momentum in the economy to implement more aggressive easing. Fed Chairman Bernanke said that the US needs job growth of 100,000 just to maintain “stability.”
He also said the US needs 150,000-200,000 to hit Fed target of 8-8.2% unemployment by end 2012. Fed Vice Chairman and President of the New York Fed has said he thinks the US needs to see payroll gains of around 300,000 per month.
Their comments give a clear indication that one of the Fed’s key benchmarks for determining the likelihood and timing of another round of QE is changes in US Non-Farm Payrolls. If NFPs (and related indicators such as jobless claims) do not quickly show substantial and sustainable improvement, a new round of QE seems increasingly likely.
Therefore the likely driver of the next sustained leg up in the gold bull market is signs of continued weakness in the US labor market. The potential negative impact on the US economy and financial system resulting from a deepening of the financial crisis in Europe is another potential trigger to the extent it drives European investors out of Euros into gold (as we saw in early 2010).
Silver hits 18-month low
Silver tends to underperform other precious metals in times of heightened market uncertainty, as witnessed last week when it slumped 6% compared to 4% declines across other precious metals.
The silver price dropped below $27 and volatility rose to just under 30% on an annualized basis. While current market conditions are difficult for silver, the silver price now sits around the same level it was when it bounced at the end of 2012 and early 2011. Net speculative futures positioning is now back to end 2011 levels. [Silver ETFs Fall to 2011 Low]
European leaders summit
With the FOMC meeting now behind us, the focus again shifts back to the Eurozone crisis. The next signpost for markets is this week’s European leaders summit, beginning Thursday.
Whether policymakers have the political will to move to a more integrated Europe remains a key issue, especially for Germany. While German rhetoric is pro-Europe, its actions remain targeted towards immediate national interest, a situation that is unlikely sit well with other leaders for long.
Investors want decisive action, and another round of brinksmanship from Germany in terms of its calls for further austerity for indebted nations woul likely cause further market turbulence. Clarity around the Spanish/European bank bailout fund would also help ease frayed investor nerves and help stabilize financial markets.
ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)