Bearish Signs For Gold And Silver On FOMC Outcome

Gold generally benefits from an easy monetary policy as investors fear that rampant cash printing will damage the value of fiat currencies, prompting them to seek safety in hard assets such as gold bullion. Gold prices rose yesterday on bargain hunting, some short covering and on expectations that the U.S. Federal Reserve at its last meeting for 2012, will announce more stimulus measures that would support Gold’s appeal as a hedge against inflation. The news, that Italy’s Prime Minister Mario Monti announced he will resign from office early next year initially pressured the Euro currency and prompted an up tick in Italian and Spanish bond yields. The Euro recovered later in the day. The markets await the result of the FOMC meeting scheduled for Tuesday and Wednesday. With the Operation Twist program ending this year end the FOMC members will be deciding whether to extend the bond-buying program. The QE4 in most probability is a done deal. But the focus of the market place remains on the Fiscal Cliff tax increases and spending cuts that is fast approaching. The Fiscal Cliff fear will continue to bear heavily on any small positive or bullish market sentiments; though the odds are higher than not that there will be a last-minute agreement among lawmakers to avoid the U.S. going over the Fiscal Cliff. The U.S. Dollar Index may also gain some fresh upside technical momentum.

Gold And Silver May Crash After QE4 Announcement
The QE4 (or QE3 Reloaded), which may be a replacement of the Operation Twist is not a new addition to debt. The same is currently running since Sep 2011 and was only slated to end this December. Gold had already shot up to its till date Lifetime high of $1925 on 6th Sep 2011 and started a decline. Remember, gold prices actually fell after Operation Twist was announced. By way of Operation Twist, the Fed sold short-term securities and bought long-term bonds at the pace of $45 billion monthly. The idea was to “Twist” the yield curve to bring down longer-dated securities in an effort to reduce borrowing costs. Operation Twist had little impact on gold since it essentially was shuffling maturities on its balance sheet, rather than adding to it. So all said and done, there is nothing new to shake the gold markets. The Operation Twist program essentially “Sterilized” the purchases by simultaneously buying and selling bonds. The expected new program could be the same and the possibility of it being very different seems low. They are simply building Reserves. The QE4 may in all modesty, give flooring to gold prices, but does not have the firepower to over rule the Fiscal Cliff Fear. It could eventually increase the inflation risk if the U.S. economy actually starts to rise because the larger the reserves are, the harder they will be to pull back in. Rising Inflation is always bullish for gold. The gold Market may be misguided due to the Fed’s announcement in September that they would do “open-ended” purchases until the U.S. unemployment rate drops. Gold Market traders may traditionally be bracing themselves after the recent dips, for a sharp rise in gold prices again after the FOMC meet results are announced. Contrary to market expectations, I expect gold and silver prices along with base metals to decline sharply. If any choppy and sudden upside movements are seen, they may soon reverse the direction as the Fiscal Cliff factor looms ominously.

Technically, Comex Gold February Futures prices have a strong support at $1675, which if breached may open the flood gates to a massive dip to $1603. Comex silver too seems to have a moderate support around $32. A close below the same could lead to a crash towards $30 -- $29.35 also. I strongly feel that the gold and silver markets will decline -- A reaction totally opposite to the usual upside trend to any QE announcement seen till date. Gold, followed by silver, has always shot up after every QE announcement, as an inflation hedge and also on further currency debasement. I expect the Fiscal Cliff fear to have a stronger grip on the markets and the same will over shadow the latest monetary easing efforts by the U.S. Fed. The gold and silver markets may see sharp downfalls till Thursday, after which I expect the trend to reverse. Gold and silver will rise sharply again but I am not looking for it to happen right away and moreover, Gold will need a massive shocker event to help it break its lifetime high of $1925, while silver may simply glide up anyways. There would soon be some positive announcements or agreements on the Fiscal Cliff issue and gold and silver prices may see sharp rises from Friday, but silver may gain faster and in larger strides. I expect silver to outperform gold in Q1 of 2013. The Fiscal Cliff issue may also get postponed to March 2013, an announcement which may give some relief to the then overly sensitive markets. All base metals, especially copper, may also see some downside corrections. The markets may eventually see large short position build up on these large dips on expectations of a trend reversal in gold after 12 years to bearish. But these notions may soon prove wrong. I would prefer to build up larger positions in silver than gold on bottom fishing. Base metals and agro commodities will also rise in the Q1 of 2013, triggering large scale Inflation -- or rather, I would say -- Hyper Inflation. Remember -- gold and silver have a historical bounce back period in the year following the U.S. presidential election. According to the weekly commitment of traders report from CFTC, the current net-long positions in gold are at the lowest level since mid August, but the net-long position for silver dropped only slightly.

Fed Likely To Sustain Stimulus Program
The U.S. Federal Reserve currently buys $40 billion of mortgage-backed securities and $45 billion of Treasury securities a month. Officials highlighted that $85 billion figure in September, and have indicated since that it remained their rough target. The U.S. Economy remains lackluster and millions are yet looking for work. It would be odd for them to disappoint the expectations that they have created themselves. The U.S. Federal Reserve is widely expected to announce on Wednesday that it will continue buying Treasury securities to stimulate growth in the New Year. The Fed’s public declaration in September that it would buy bonds until the outlook for the labor market “improved substantially” has cleared away much of the uncertainty and controversy that usually precedes such announcements. There have been views that the Fed might slightly decrease the total amount of purchases, to $80 billion, or increase the share of mortgage securities. The Fed may decide to drop the sterilization portion of Operation Twist and just straight up monetize debt rather than merely shift duration of instruments. The practical factor is the dearth of short term instruments for the Fed to trade. The other factor is that the election is now past, and the ‘restraint’ that the Fed often shows during a presidential election is now off the table.

Though there is a serious doubt in the Fed’s ability to improve the situation, it is absolutely clear that the U.S. Federal Reserve is determined to keep trying. The U.S. Federal Reserve has also said that even if Congress and the White House negotiate a compromise, the Fed’s efforts would continue, though the Fed has issued a warning that a failure to avert scheduled tax increases and spending cuts next year would overwhelm their efforts and plunge the economy back into recession. Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta said in a recent speech that, I expect that continued aggressive use of balance sheet monetary tools will be appropriate and justified by economic conditions for some time, even if fiscal cliff issues are properly addressed. I am not prepared to say we are remotely close to substantial improvement on the employment front, he said. To continue the purchases of Treasury securities, the U.S. Federal Reserve will need to change its approach. It is now buying long-term securities with proceeds from the sale of short-term securities, but it is running out of inventory to sell. The most likely alternative is to create money by crediting the accounts of banks that sell bonds to the Fed, the same method now being used to buy mortgage bonds and also to finance earlier rounds of the Federal Reserve’s Quantitative Easing. Charles L. Evans, president of the Federal Reserve Bank of Chicago, said last month that the Fed should declare its intent to keep short-term interest rates near zero until the unemployment rate fell below 6.5%, provided that the rate of inflation did not exceed 2.5%. But, looking back into history, the unemployment rate exceeded 7% in the mid-1980s and again in the early 1990′s, and in both cases the Fed waited until the rate fell well into the 6% range before it began to raise interest rates.

Time For Silver Investment: The Better Option To Gold
Silver remained the best investment option this year and will also be for the next year as it almost always rises in tandem with gold and outperforms over the longer term. It is the Industrial demand growth that will drive the white precious metal as it gives silver a feature that gold could never possess. 46% of new annual silver mining and recycled production is consumed every year by industrial demand. This means it is not available for hoarding and investment in the future. However, industrial demand that is consumed and not added to inventories is not the reason silver prices have risen dramatically since 2005. The reason is that new investors and net new investment in silver are affecting the price of the marginal ounce of silver. Apart from the rising Industrial demand and a tight supply-demand situation that drove silver prices higher, the real driver of prices over the long-term is more than consumption -- It's the trend in silver investment.