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Reggie Yau, CFA, currently engaging at private equity and structured products, has former experience in global macro, statistical arbitrage and derivative strategies in liquid investments.
  • A Timeline Of Gold - Revisit The Key FOMC Meetings And US Non-Farm Payrolls 0 comments
    Apr 22, 2013 12:47 PM

    Which direction is gold heading? We have some clues after studying the recent FOMC events and US jobs data.

    FOMC setting numerical targets for continuity of easing

    The FOMC meeting on December 2012 has made the continuity of asset purchases anchored with both jobless rate (6.5%) and inflation rate (< 2.5% in 1 - 2 years ahead). Since then we have found a new angle to understand gold movements.

    (click to enlarge)US Change in non-farm payrolls MoM (Source: Bloomberg)

    (click to enlarge)US unemployment rate (Source: Bloomberg)

    The jobs data released on March 8 was much better than consensus and the jobless rate was said fell to 7.7%. Buoyed by a strong equity market, the FOMC has become more optimistic and therefore exits of the asset purchases have come to discussion on March 20.

    There was nothing unique in the March 20 statement release, but the minutes for this meeting released on April 10 suggested more details of how the optimism within the committee is developing.

    Highlights of the minutes of the March 20 meeting


    Committee Policy Action

    "Members stressed that any changes to the purchase program should be conditional on continuing assessments both of labor market and inflation developments and of the efficacy and costs of asset purchases."

    " member judged that the pace of purchases should ideally be slowed immediately"

    "A few members...with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around midyear, with purchases ending later this year"

    "Several others thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end."

    Threat of cut in Asset Purchases

    So up to this point, the market should realize that the threat of cut in asset purchases is not far - it could be as soon as mid-year if the jobs data continue to improve and inflation expectations continue to be subdued.

    Gold went down after the release of the minutes on April 10.

    (click to enlarge)XAUUSD intraday, 20130410 (Source: Bloomberg)

    The price action was then a orderly and sustainable selloff, and it speeded up after speculators saw the trend, coupled with panic selling and stops caused by tightening of margin requirements in futures exchanges. All of these factors made the history (well, add that Cyprus gold selling story if necessary).

    (click to enlarge)XAUUSD 20130410 - 20130419 (Source: Bloomberg)

    The FOMC rate decision on May 1, 2013, however, has a possibility to fine-tune its optimism. Based on the jobs data released on April 5, the employment change has expanded at a disappointing pace, though jobless rate has continued to fall.

    And therefore despite the 7-sigma move within 5 days that scared away many investors or leveraged longs, the upcoming weeks towards the next FOMC meeting is likely to provide a shelter for gold for now - although, the risk of cut in asset purchases will come, sooner or later.

    [Originally published on APR 19, 2013]

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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