Fed holds power to halt gold, silver rally
SAN FRANCISCO (MarketWatch) -- Gold and silver prices have been in rally mode as traders bet on further monetary easing by global central banks. This week's policy decision by the U.S. Federal Reserve could bring those gains to an abrupt end.
"If additional Fed action does not happen, then the monetary side of gold's story would come under pressure, risking a breakdown closer to $1,625" an ounce, said Richard Hastings, a macro strategist at Global Hunter Securities.
On Thursday, the Fed will make an announcement on monetary policy -- potentially deciding on further quantitative easing, such as large purchases of bonds.
Hastings points out that on a technical basis, gold has rebounded almost back to the midpoint of the entire up and down cycle seen in late 2011, when gold soared from about $1,625 to more than $1,900 intraday. Once the market gets "close to this type of 50% move, things require a lot of alternate engines ready to blast prices into the next level," he said.
December gold closed at $1,731.80 an ounce Monday, down $8.70 on the Comex division of the New York Mercantile Exchange. On Tuesday, it climbed $3.10 to finish at $1,734.90. Read about the latest action in gold.
"We have to make the distinction between economic weakness, with slow job creation, and economic weakness with job destruction," said Hastings. "So far, we are not seeing layoffs, thus the Fed might be watching and waiting for the effects from the fiscal cliff next year before doing anything."
The Fed's decision will matter to gold and silver if the central bank decides to take action on bond purchases, said Hastings.
But he emphasized that Thursday's expected announcement will be primarily about rates, and the market may not hear anything material in regard to a bond-buying program.
"The market might get annoyed if the Fed is going into a prolonged watch-and-wait phase -- talking about concerns and [being] ready to act, but waiting until things get sufficiently bad to act," he said.
If that happens, the next support for gold would come from a negative global monetary event, he said -- and that would bring Europe into focus.
Last week, the European Central Bank revealed a plan for buying bonds from struggling euro-zone nations in unlimited quantities. Read more on the ECB bond-buying plan.
If the Fed unveils its own bond-buying ambitions, "we have the prospect of a possible double-whammy for growth in the developed world," said Julian Phillips, founder of, and writer at, GoldForecaster.com and SilverForecaster.com.
"A push for growth simultaneously on both sides of the Atlantic by the Fed and ECB may kick start growth," but the growth won't likely last for long, he said.
Even so, Phillips, who's based in South Africa, said that no matter what the Fed and European policymakers decide this week, the precious metals rally will likely continue. On Wednesday, Germany's Federal Constitutional Court is slated to release its decision on the country's participation in a European fund designed to aid countries like Spain. A negative decision could derail the ECB's bond purchase plan. Read more on what's expected from German court ruling.
When it comes to gold, "investors don't buy gold for the long-term to make money -- they buy it because they have money," he said. "They want to protect what they have made to date, so hold gold because it rises" in inflationary and deflationary environments.
"Gold has none of the characteristics of currencies, which is why it is a counter to currencies," he explained further. "Gold, and silver, are saying no matter what politicians and bankers do now, precious metals are the place to be."
"Gold and silver have broken out now, and no news from developed world bankers or politicians will stop [them] now," he said.