(Kitco News) - Gold slumped just after a Federal Reserve announcement of more stimulus measures Wednesday as traders who previously bought, expecting a still-larger package, sold to exit from their contracts, analysts said.
Nevertheless, said one, the global problems contributing to a constructive backdrop for gold remain in place, in a market where dips have been used as buying opportunities.
As of 2:54 p.m. EDT, December gold was $16.40, or 0.9%, lower at $1,792.70 an ounce on the Comex division of the New York Mercantile Exchange. It had been trading near $1,804 around 20 minutes ahead of the Fed announcement.
At the end of a two-day meeting, the Federal Open Market Committee said it intends to sell $400 billion worth of short-maturity debt and instead invest in bonds maturing between six and 30 years by the end of next June. The market had anticipated such a move, which was dubbed "Operation Twist." The Fed also said it would reinvest proceeds from maturing securities into mortgage-backed securities, instead of other Treasury debt.
Sterling Smith, commodity trading adviser and analyst with Country Hedging, cited a "universal disappointment" as some market participants had been factoring even more aggressive Fed action. Had there been even more stimulus measures, this would have raised the prospects for inflation even further, he and others said.
"They (market participants) are a little disappointed with the size of this package," said Frank Lesh, broker and futures analyst with FuturePath Trading. "It's not as inflationary as they thought."
Lesh said many traders were looking for a "Twist" operation of $500 billion to $600 billion. Smith added that some might have anticipated some kind of quantitative easing, or fresh outright buying of Treasury securities, on top of the action the Fed did take.
Still, the dip in the gold price appeared to be mainly liquidation from short-term traders who had expected more aggressive Fed action.
"This doesn't really change the outlook for gold," Lesh said. "It's just a bump in the road. We still have a lot of problems out there, any of which could flare up at any moment."
When they do, this often leads to safe-haven buying of the metal. Lesh commented that there seems to be a tendency lately in which traders are not "chasing" prices higher but have been looking to buy on price dips.
By Allen Sykora of Kitco News; email@example.com
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