Gold Still Waits for Fed

June 27, 2012 – Gold dropped over $50 per troy ounce in moments after last Wednesday’s news from the Federal Reserve that the US central bank would not initiate another round of aggressive stimulus known as quantitative easing. The central bank opted instead to continue its Operation Twist. The program will continue through the end of the year.

Through Operation Twist, the Fed sells short-term US Treasury securities from its portfolio in order to simultaneously purchase longer-term Treasury notes and bonds. This stimulates the economy through lowering medium and long-term interest rates without accelerating growth in the M2 money supply. Quantitative easing, a much more aggressive form of economic stimulus, expands the Federal Reserve’s holdings of Treasury securities, creating new money and ultimately causing inflation in the monetary system.

Gold and silver prices have been experiencing a correction that has precious metals analysts considering the status of the market. Gold was off more than 3 percent last week in New York trading, off the recent high of $1,627 near $1,570. This is a loss of all the gains made in gold this year and an 18 percent drop from the all-time nominal high set in September 2011. Silver has fallen more than 6 percent from $28.75 per troy ounce to $26.90 per troy ounce, registering a 3.4 percent drop for the year and nearly 45 percent drop from the April 2011 peak.

The next major move upward in gold and silver could arise from additional monetary stimulus prompted by economic news either in America or arising from the European Union.

Though there has been another round of bailouts for Europe’s most distressed economies and most indebted banks, there is continued concern about the European Union and doubt in the markets as to the effectiveness of this weekend’s Summit in Brussels.

Losses in precious metals are already beginning to reverse on solid ground as safe-haven buying on the European dispute contributes significant demand in the market.

No soluble resolution is expected from this weekend’s Summit and posturing by German leader Angela Merkel about European Union nations solving their own debt crises has led to some front-running by investors.

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