Gold Price Awaits Fed Meeting, With a “Twist”?

GOLD PRICE NEWS – The gold price held near $1,800 per ounce Wednesday morning as the markets await the outcome from today’s Fed meeting.  While the price of gold stabilized, silver rose 0.6% to $39.98 per ounce.  U.S. equity markets looked to open slightly lower, with S&P futures down 1.30 to 1,194.70.  European markets were lower across the board after euro zone meetings on the Greek bailout proceeded but thus far led to no concrete outcome.

On Tuesday the gold price rallied $24.79 to $1,803.58 per ounce as precious metals bounced back from Monday’s large sell-off.  The price of gold rebounded to $1,795 in morning trading and extended its gains after the U.S. housing starts in August came in below expectations.  The spot gold price reached an intra-day high of $1,812.70 before backing off a bit in afternoon trading.

Silver headed north in concert with the gold price, but posted a more moderate gain of $0.20, or 0.5%, to end the day at $39.85 per ounce. Gold and silver stocks surged higher, with the Philadelphia Gold & Silver Index (XAU) rising 2.1% to 220.03.  Among gold producers, IAMGOLD (IAG) and Yamana Gold (AUY) rallied 4.6% and 4.7%, respectively.  As for silver mining companies, Coeur d’Alene Mines (CDE) advanced 1.4% and Silver Standard Resources (SSRI) added 1.2%.

Housing starts fell 5% to 571,000 in August, versus a consensus estimate among economists of 590,000.  In doing so, housing starts declined by the most since April of this year, and became the latest batch of disappointing U.S. economic data.  Sal Catrini at Cantor Fitzgerald commented that “The housing market is not only bad, but still missing low expectations.”  Scott Brown, chief economist at Raymond James, argued that the housing market “won’t improve until the labor market improves substantially and that doesn’t look like that would happen this year.”

The Federal Reserve and Chairman Bernanke will undoubtedly pay close attention to the housing data in light of numerous economic reports in recent months indicating that the U.S. economy may be nearing a recession.  With this afternoon’s Federal Open Market Committee (FOMC) announcement, most economists and investors are expecting the Fed to launch a new form of “Operation Twist” – a policy the Fed implemented in the 1960s whereby it sold shorter-term U.S. Treasuries and purchased longer-term ones in the hopes of driving down long-term interest rates.

Goldman Sachs chief U.S. economist Jan Hatzius discussed his expectations for the Fed meeting in a note to clients on Tuesday. ”Although not a done deal, we see a high probability that the FOMC will announce further easing steps at the conclusion of this week’s meeting,” Hatzius wrote.  He went on to say that some form of Operation Twist “looks very likely,” although the exact structure of it is uncertain.

“We see low odds of a change in the Fed’s communication of its policy objectives…There also appears to be little appetite on the committee for an outright expansion of the Fed’s balance sheet,” Hatzius added.  Such an expansion would likely come in the form of a third round of quantitative easing (QE3), which “does not look like a realistic option for the upcoming FOMC meeting.”  Hatzius later noted that “the Fed may ultimately decide to move in this direction, but we see little chance that this will happen on Wednesday.”

Although Hatzius did not discuss the implications of the Fed meeting for the gold price, considerable uncertainty remains for the yellow metal, at least in the short term.  While Bernanke and his fellow central bankers have committed to a near-zero Fed funds rate through mid-2013, the likelihood of a third round of money printing in the near future remains somewhat low.

The outcome of today’s Fed meeting for the gold price is more likely to be based on the language and tone of the FOMC statement.  The more dovish Bernanke and his colleagues appear, the more compelling a case can be made for higher gold prices.  However, if the FOMC projects a less dovish stance, the price of gold could fall victim to selling.