Is The FOMC Meet A Buy, Hold Or Sell Signal For Gold?

Includes: GDX, GLD, IAU
by: Disruptive Investor

In the June 20, 2012, meet, the Federal Reserve announced the extension of operation twist until the end of 2012, which includes purchase of Treasury Securities worth $267 billion. The Fed also suggested that it is ready to take further action as and when needed.

Gold exhibited a rather negative reaction to the FOMC announcement and the precious metal corrected by nearly 1.5% for the day. Even as I write this article, gold is down again by over 2%.

This price movement of gold leads us to the important question - is gold a buy, hold or sell after the current FOMC announcement?

This article discusses my opinion on this question and the likely trend for gold in the medium-term.

In my opinion, one needs to hold on to gold and accumulate the precious metal on any further price correction. I have discussed the primary rationale for this conclusion below.

It is very clear that the Fed is prepared to act and support the economy whenever growth gets sluggish. Therefore, if one needs to figure out the medium to long-term trend for gold, it is important to come to a conclusion related to the duration of sluggish economic growth.

The opinion of FOMC members on the appropriate timing for policy firming is a good indicator of the expectation related to strong or sluggish economic growth in the medium-term. The chart below gives the view on the appropriate timing for policy firming by the FOMC members.

The positive point I can derive from the chart is that no FOMC member considers 2016 as the appropriate time for policy firming in June 2012 when compared to January 2012. However, on the flipside, six FOMC members consider 2015 as the appropriate time for policy firming.

This means that these FOMC members expect the economy to exhibit really weak growth until 2015 or around that time. In my personal opinion as well, economic growth in the United States will remain sluggish for a prolonged period.

From a policymaker's perspective, this means providing constant support to the economy. Therefore, from a medium to long-term perspective, loose monetary policies will continue to benefit gold.

Further, the statement on preparedness to take more action (if needed) coupled with the acknowledgement of weak employment and economic growth sets the stage for some more QE action in the next few FOMC meets.

Therefore, any correction in gold prices is an excellent opportunity for long-term investors to consider exposure to the precious metal.

Besides the U.S. policies and economic growth expectation, the crisis in the eurozone is also positive for gold. I had discussed in one of my recent articles on how the dysfunctional the European banking system can prove to be positive for gold.

In conclusion, investors can consider exposure to physical gold, gold ETFs and gold mining stocks on any correction for long-term. The best part of the bull market for gold is still to come in my opinion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am long gold (exposure through physical gold holdings).