Gold and Stocks Plunge, Dollar and Govt. Bonds Rally, Fed "Setting Up for More QE"

Posted by Wealth Wire - Thursday, September 22nd, 2011

U.S. dollar gold prices dropped to $1739 an ounce Thursday lunchtime in London – a 4.1% fall in less than 24 hours – as stocks and commodities also fell heavily following Wednesday night's announcement by the US Federal Reserve.

Silver prices dropped to $37.22 an ounce – 8.4% off yesterday's high – while major government bonds and the US Dollar saw strong gains.

Gold prices are "failing to find support from the kind of pessimistic headlines that have recently fuelled its bull run," notes one gold bullion dealer in London.

"There are significant downside risks to the economic outlook, including strains in global financial markets," the US Federal Reserve said Wednesday following the end of its latest Federal Open Market Committee meeting in Washington.

The Fed that it will buy $400 billion of longer-dated (6 to 30 years) US Treasury bonds – while selling shorter-dated bonds worth the same amount – in a widely-anticipated move dubbed Operation Twist.

The Fed will also reinvest proceeds from agency debt and agency mortgage-backed securities – meaning securities it bought from government-sponsored enterprises such as Fannie Mae and Freddie Mac – "to help support conditions in mortgage markets."

"The Fed may be setting us up for November, a move toward another, more aggressive quantitative easing," Tim Condon, Singapore-based head of Asia research at ING, told Bloomberg Television on Thursday.

Stock markets fell heavily on Thursday morning – with the FTSE down nearly 5% by lunchtime.

"While Operation Twist was well anticipated perhaps the severe warning from the Fed that 'there are significant downside risks to the economic outlook' was not," says Jane Foley, senior foreign exchange strategist at Rabobank.

"Monetary policy is reaching its limit," adds Manish Singh, head of investment at Crossbridge Capital in London, which manages assets worth over $2 billion.

"The outlook has not improved despite QE1 and QE2...fiscal measures have to do the heavy lifting...so far [though], what we have got from the Congress is only disappointment and half- baked measures."

Elsewhere in Washington, the Republican-controlled House of Representatives on Wednesday voted against a bill designed to keep the US federal government funded beyond the end of this month.

Here in Europe, public transport workers in Greece went on strike Thursday in protest at deficit-cutting measures announced by the Greek government.

"We are obliged to resist...not even Greece's German and Turkish conquerors imposed such taxes," said Antonis Stamatopoulos, head of staff on the Athens subway.

Greece needs to convince the European Union, European Central Bank and International Monetary Fund that its austerity measures are on track in order to receive the next installment of last year's bailout – without which the Greek government expects to run out of money within weeks.

The problems in the Eurozone "threaten to reignite an adverse feedback loop between the banking system and the real economy," the IMF warned earlier this week, adding that some European banks may need more capital if they are to withstand an escalation of the crisis.

"We cannot rule out that some banks will need help from the state," EU financial services commissioner Michel Barnier added on Thursday.

Economic activity in the Eurozone is contracting this month, according to flash data published Thursday morning.

The provisional September Eurozone purchasing manager index for services fell to 49.1 – down from 51.5 for August (a figure below 50 indicates contraction).

Eurozone manufacturing PMI meantime fell to 48.4 – down from 49.0 last month.

Similar figures for Chinese manufacturing also indicate contraction – with provisional PMI figures from HSBC falling to 49.4 – down from August's 49.9.

"There is no doubt the risks of a global recession have grown," says Jeavon Lolay, head of global research at Lloyds Banking Group.

"Looking at gold," says David Wilson, director of metals research at Societe Generale, "you'd have thought that gold would be well supported given the European situation, the US situation and a slowing China...it's really the Dollar rally that is not particularly helpful."

Dollar gold prices were down 4.2% for the week by Thursday lunchtime.

Euro and Sterling gold prices meantime were down 1.4% and 1.5% respectively – while gold in so-called commodity currencies Australian and Canadian Dollars was up for the week – 1% and 1.4% respectively.

*Post courtesy of Ben Traynor of BullionVault.

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