Prices of precious metals continued their downward trend yesterday after the Federal Reserve (Fed) announced that it would invest $400 billion over the next nine months into long-term US government bonds with maturities of six to 30 years. However, this measure will not expand the Fed´s balance sheet further, since the US central bank will sell short-maturity bonds (three years or less) in exchange.
Fed Chairman Ben Bernanke and the Federal Open Market Committee (FOMC) met the expectations of analysts with their announcement. Markets have been expecting “Operation Twist”, though some were expecting larger purchases than the $400bn thus far proposed. This programme is designed to keep long-term interest rates at record low levels, and together with the $447 billion stimulus plan recently unveiled by President Obama, it is hoped that these measures will revive the ailing US economy.
Many investors are, however, disappointed with the Fed´s decision as they had expected much more from yesterday's central bank meeting. Some had predicted the onset of a third round of quantitative easing “QE3”. Such measures would have had the result of increasing the Fed´s assets further, which currently stand at around $2.9 trillion. This way, the domestic financial system would have been provided with additional liquidity, whereas these expectations were not met yesterday. The adoption of QE3 may prove to be difficult, if the US government does not want to upset their largest creditor, China.
High-ranking political and economic representatives in China have repeatedly warned the US in recent months to say no to the adoption of new money-printing measures, as this hurts the competitiveness of Chinese exports to America. Moreover, the Fed´s first two bond-buying programmes resulted in high capital amounts flowing into Asian economies – above all into China – for speculative purposes, causing price rises and fears over asset bubbles.
The Fed´s decision helped the dollar to gain further ground. The greenback continued its rally against other major currencies, with the Dollar Index rising by 1% to over 78. The strengthening dollar is currently hurting stocks and precious metals. The front-month Comex contract lost 1.3% to settle at $1,785 per troy ounce yesterday evening. Observers seem to be convinced that the Fed´s announcement will encourage buying of longer-dated US government securities. This will of course also benefit the US dollar, which would mean that gold and other precious metals will be less in demand as safe havens. From a technical perspective, the greenback has recently taken out several key levels, encouraging expectations that the dollar will continue to rally.