The FOMC board will meet on Tuesday March 13 to announce its interest rate policy and also issue a communication statement. The board can move stock, bond, currency and commodity markets through its ability to set the overnight lending rate and is therefore an important monetary event. The Fed has made it very clear in the past that interest rates are to remain at current ultra low levels until 2014 and that phenomenon is well priced into the markets. However, it seems that many out there, particularly in the gold (NYSEARCA:GLD) market, are banking on the idea that an additional liquidity program (QE3) is seriously being considered by the committee. Although some members of the committee are likely to remain in favor of an additional unsterilized bond buying program, recent events can guide us in assuming what message the FOMC board will release on Tuesday.
The Chairman's Testimony
During his testimony to the House Financial Service Committee, Fed Chairman Ben Bernanke focused on the employment situation, expressing his worries for the long-term unemployed and his doubt in the strength of improving economic data (see more of the statement see here). At the same time, the chairman failed to even hint the need of additional bond purchasing measures. Investors took the omission to heart, thereby sending the yellow metal down close to $100 an ounce.
For those unfamiliar, the policy of creating money to purchase bonds in the open market, otherwise known as Quantitative Easing, sends investors into perceived safe havens like gold in anticipation that the money creation will generate high inflation rates.
Gold Price Percentage Move (London PM Fix Quoted in USD):
The Improving Employment Picture
The creation of 227,000 new jobs and upward revisions to prior periods' estimates is another key point that postpones the need for more QE.
In addition to the preliminary estimate of 227,000 jobs created in February, December 2011 was revised from 203,000 to 223,000 and January 2012 was revised from 243,000 to 284,000.
Nonfarm Payroll (Seasonally Adjusted):
*January & February 2012 reflect preliminary estimates
*Data Source: BLS
Long-Term Outlook Still Looks Good
There is no doubt that recent economic data is improving relative to the summer of 2011, however the data has its weaknesses. The labor participation rate is extremely low and more and more job gains are in temporary employment - hardly indicating quality.
The Greek Debt fiasco is not settled just yet. Elections are going to be held later this year and the leading candidate, Antonis Samaras, has pledged to renegotiate bailout terms with the Troika. One can safely assume the Merk-ozy team (if Sarkozy gets re-elected) will show Samaras the EU exit if he indeed tries to do so.
Lastly, if Ireland and Portugal seek similar deals as Greece, contagion will follow and Spanish debt burden will get heavier and heavier. Therefore, recent events might point to short-term weakness in gold, however the base case long-term argument remains intact.