The Daily Nugget: Mixed Messages Over Tomorrow’s FOMC

As expected gold has remained quiet so far this week, head of the FOMC announcement and subsequent Bernanke press conference.

To add further to the Fed’s belief that everything is improving, data yesterday showed home builders are feeling confident about industry conditions for the first time since pre-crisis.

Holdings of gold backed ETFs in the SPDR Gold Trust fell once again to a four year low yesterday.

SocGen report – bearish on gold

As reported widely yesterday, SocGen released a report saying a ‘paradigm shift’ amongst those who invest in gold will see the price fall to $1200. They also expect to see holdings in gold backed ETFs fall bay further 285 tonnes this year, exceeding the expected increase in physical demand for jewellery, bars and coins.

The fall in the gold price is hurting producers, the report said, and therefore they expect to see ‘a substantial step-up in hedging this year compared to last year.’ An increase in hedging would push prices lower.

Indian gold demand still vulnerable

Indian gold futures traded lower whilst physical demand also remains subdued following a busy buying season and citizens managing a weak rupee alongside increased import duties.

Yesterday Economic Affairs Secretary Arvind Mayaram told Bloomberg television that the government was prepared to take further measures when it comes to gold imports, “If required, there are other measures that can be taken and they will be considered at the appropriate time.”

China’s gold ETFs

Gold’s second largest importer, China, is also experiencing low sentiment. Premiums have fallen from $6 in April to $2. Shanghai gold futures fell 0.5% this morning. Many gold investors will not only be looking towards the Fed meeting but also the health of the Chinese economy as a gauge of the health of the gold price.

Barclays said yesterday that they are looking to see whether two upcoming gold-backed ETFs will attract new demand to the gold market, or replace physical demand. Comparing it India the bank finds that similar products launched in India have not seen a shift in the preference to hold physical. However it may be different in China, ‘close-ended products that have been listed in China have been well received; therefore, it will be essential to track whether physical demand is replaced by ETP buying or is fresh net demand.’

FOMC meeting

Today the June FOMC meeting will commence, we do not expect to see any significant moves prior to tomorrow’s press conference. Morgan Stanley said yesterday that they expect the FOMC to ‘indicate that the shortfall of inflation below target is becoming a concern, which should help push expectations of a start of slowing QE in December.’

Bernanke is expected to ‘calm the markets’ and perhaps clarify his comments made during an appearance in front of the Joint Economics Committee during which he was purposefully vague.

Whilst we expect him to remind markets that the committee may reduce purchases, given outlook and sustainability of the recovery, we also expect Bernanke to reiterate the Fed’s commitment to remaining accommodative to monetary policy.

In regard to how gold will respond, Deutsche Bank believe it remains ‘vulnerable to renewed selling pressure’ depending on the outcome of the meeting tomorrow. Should the FOMC reiterate commitment to the programme for the next few months then expect to see an increase in the gold price.