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Precious Points: Fed Sends "Buy" Signal

The typical view this week seems to be that the FOMC policy statement was virtually meaningless, and maybe for the larger markets it is. To my ears, listening on behalf of the precious metals, it almost sounds as if the Fed just opened the door for a steady drift higher in commodity prices and sent us a subtle buy signal.

Look at the steep dip in silver leading up to the Fed statement. Similar though less pronounced moves happened in gold and oil. Remember that going into Wednesday, everyone was expecting a hawkish statement in line with public comments by Fed members. But as you can see, silver recovered and went higher because the statement is not only NOT hawkish on inflation, but is actually bullish for commodities!!

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

In addition to saying the economy is actually going to grow at a moderate pace, the statement forecasts a continued "high level of resource utilization".Sounds bullish to me! That the Fed still sees oil prices as low, takes some pressure off. The real kicker, though, is that, by omitting language that cited high commodity prices as a source of inflationary pressure, the FOMC seems to be letting itself off the hook if commodity prices should start to rise again. If a rise in commodity prices will not necessarily be seen as inflationary, but as a fundamental supply and demand issue, its likely we won't see the same concerted effort to pull down gold and oil like we did earlier this year - IF the rise comes at a measured pace. But, coupled with the moderate expansion, that's about as sure a sign as I could expect that industrial commodity prices will go higher!

Several factors will now come into play to determine the direction of oil and the precious metals. As the chart below indicates, silver traded sharply higher on the Fed statement, but met resistance in New York trading and was gradually pulled down to its 50 day moving average. Notice the close of trading occurred with a convergence of the 50 day and 200 day averages. While a numbers of forces will weigh to determine the next tick, my bias favors a retest of the September high at $13.

Readers,

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