Good Day,

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. - with these few, but carefully chosen words, the Fed set into motion...more of the same. Dollar weakness, yes, but also a dampened enthusiasm for the type of recent risk-taking that has been based on perceptions of a much more robust recovery than the one the Fed describes at this time.

The post-meeting statement by the US central bank contained additional key acknowledgements as well, such as the 'we believe in the on-going economic recovery' mantra, and the obligatory 'tribute' to the inflation hawks within its ranks (we think this was a contentious meeting with a split voting body of hawks and doves). For example, it is understood that the Fed is considering borrowing money from money market mutual funds via reverse repos as one way to drain liquidity from the system.

The overriding theme of this meeting however, was the continuing obsession with the 'slack' in the US economy and the minimal (if any) threat that-at this time- inflation poses to the system. Thus, for the moment, one can expect the Fed to watch capacity utilization with a much keener eye than it will keep on TIPS as a barometer of what is actually happening out there. That said, when the latter shows a sea-change, the interest rate (and other) triggers will be pulled. As of now, they are simply armed and ready.

The immediate reaction to the Fed gathering's textual summary in the dollar and commodity markets was mixed, at best. Here are some excerpts of media and analysts' comments made in the minutes that followed:

Commodities are taking it on the chin and dragging down stocks, said Art Hogan, the New York-based chief market analyst at Jefferies & Co. Some participants are looking at the recent rally and saying we need to see a pullback before putting money to work on either market.

The dollar erased its decline as the decision to end its $1.45 trillion in purchases of mortgage-backed securities and housing agency debt three months later than previously scheduled indicated the recovery won't be as robust as expected.

It looks like even though nothing is new, and the dollar weakness can continue, the market may have been a little long on foreign currencies, said Laurent Desbois, president in Montreal of Fjord Capital.

As can be seen by the above, we had fits and starts for the few remaining afternoon hours in the dollar, commodities, and equities. The dollar fell, the dollar rose, gold rose, gold fell. Equities lost ground in Asia, except they rose in Japan. Copper and oil fell, while Treasuries showed little change. Some confusion, but well-justified, when one considers that the Fed at once offered the prospect of continuing low interest rates while diagnosing the 'green shoots' as still subject to early frost, as opposed to the late frost it was worried about this spring. These green shoots may turn out to belong to some annual plant variety.

At any rate, the mild confusion and indecisive patterns following the Fed's statement all but dissipated overnight, and this morning's market action revealed a continuation of the attempts to push gold to higher ground on the back of the dollar's inability to get very much above the 76-mark on the index. Although oil and copper lost ground as the economic recovery suffers from localized (US) anemia, the legion of gold longs (tenfold more than that of the shorts) continued to aim the cannons towards a) the 1023 level recently touched for a moment, and b) the 1034 level first etched into history books on 03.17.08

New York bullion dealings opened with a $8.10 gain in gold, which was quoted at $1016.30 per ounce basis spot bid against a 0.15 decline in the US dollar on the index (to 76.24) and a 1.4785 tick against the euro. Crude oil dropped 50 cents to trade at $68.46 and showed additional evidence of (slowly) eroding support. Silver added 15 cents on the open, starting off at $16.90 per ounce. Platinum rose $5 to $1324 while palladium recovered a bit, climbing $3 to $296 per troy ounce.

Does any, or all of this imply that the one-way trajectory to the lunar surface has now been charted and is ready for travel? India's Commodity Online interviewed Commerzbank analyst Eugen Weinberg yesterday, and posed two questions to him in the hours just ahead of the Fed meeting:

1. The markets are awaiting the Federal Reserve's meeting today; what really are they expecting from it and how will it impact the market?

Last week there were rumours that some of the Fed governors were really thinking about a hike in the interest rates during today's meeting; I think it is too early, these expectations will not be fulfilled and that might impact the dollar even further. That, might bring the dollar even under more pressure, but, I think that the rise of dollar is imminent because it has sold out at the moment and that would impact also the gold prices because the stronger dollar will be associated with global gold prices going forward. 

1. There has been a lot of build-up in non-commercial traders [gold] long positions. Is there a worry amongst investors that there could be an unwinding of the position now?

It's definitely a very large concern because the number of speculative longs at COMEX is almost 10 times higher than the number of outstanding short positions and this is a big concern and a big danger for the market because those are weak hands and should unwinding come - I think the trigger for the unwinding would be the strength of the US dollar- we will see a strong slump in the gold price, probably moving to somewhere between 900 and 960 dollars going forward.

How will the gyrations in gold affect 'poor man's gold?' - Well, the jury that is VM Group - part of BNP Paribas opines that basically, we just need to think of silver as gold on steroids, or gold to the n-th power. In both directions, that is:

  Whether the gold price eases or moves higher, silver will likely do the same, but to a greater degree, analysts at VM Group said in a report on Wednesday. Silver is singing to gold that old refrain: 'anything you can do, I can do better, VM comments in the September issue of its BNP Paribas Fortis/VM Group Metals Monthly report.

So if gold shifts higher, then silver will continue to outperform. However, if gold goes down, so will silver, and by more. VM expects a retreat in silver prices in the short term, but then further gains in the medium term, as gold resumes its upward path. Whether silver can take out its 2008 high of over $20/oz is debatable, however; at current relative prices it will probably require a gold price in excess of $1,100/oz, the VM analysts said. Not impossible, but unlikely to be seen in a hurry.

In the three weeks to September 17, gold's dollar price climbed 8%, while silver rose an astonishing 22,3%, to $17,38/oz over the same period. This reduced the gold/silver ratio down to 58,57, the most it has been in favour of silver since mid-August 2008. However, compared with the March 2008, when gold last rose above $1 000/oz, silver is still relatively undervalued - it was above $20/oz at that time.

The explanation is that this time last year silver plunged, when an outright global economic depression appeared a real possibility, and it has yet to fully recover, VM said. In a report on Wednesday, RBC analysts Michael Curran and Cailey Barker also predict that gold and silver prices will pull back over the next month or two, followed by renewed strength later in the year.

The believe silver will likely retreat to the $14/oz to $15/oz range, but could reclaim the $20/oz level in the next round of strength, if gold tests the $1,050 level. RBC maintained a silver price forecast of $13,25/oz for 2009 and $13,50/oz for 2010. While our 2009 forecast looks a little light, as year-to-date spot silver has averaged $13,60/oz, we are waiting to see if our forecast of a pullback in the next month or so proves accurate, the analysts said.