PRECIOUS METALS REACTIONS POST FOMC MEET

The positive Greek Election results did give a boost to the equities market but there were mixed reactions from precious metals. Mainly because the entire market is waiting for the outcome from the Fed’s FOMC meeting.

The results of the Greek elections, in which the pro bailout party had won, didn’t seem to impress forex and commodities traders. All eyes in Europe continue to stare at Spain & Italy. In yesterday’s G20 meeting the leaders talked about the EU debt crisis and Spain’s soaring borrowing costs.

The G-20 meeting, held at Mexico continued for two days- 19^th and 20^th June. At the conclusion of the summit, leaders announced a U$430b firewall to give some stability to an increasingly unsettled global market. Safe-haven bids boosted gold as G20 leaders pressed Europe to do whatever it takes to combat Europe's crisis after a victory for pro-bailout parties in a Greek vote reduced the chances of a euro breakup but failed to calm financial market

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, started its two-day policy meeting - there were growing expectations that it will look to ease policy further to stimulate economic growth in the country. Many expected the Fed to extend its long-term bond buying program through Operation Twist beyond its current June deadline – the result being a weaker USD. ‘Operation Twist' programme implies funding the purchase of long-term debt by selling short-term notes - which is set to expire at the end of this month.

Fortunately these anticipations proved true. In a bid to reduce unemployment and protect the expansion, Fed has decided to extend Operation Twist till the year end with a sum of U$267, but no announcements regarding QE3 plan have been made.

Immediately after the meeting, Gold saw a range of Rs. 30,075 to Rs. 30,155. Gold is now expected to move within 1580$- 1640$ and any movement beyond this range will bring about great volatility. Though gold reduced in dollar terms, rates in Indian market remained more or less the same because rupee appreciated against the dollar to a tune above 56.20. Ratings agency Fitch, meanwhile, lowered its outlook on India to negative from stable.

Moreover, demand remains soft in India due to the lack of auspicious buying periods over the next few months. For June, the Bombay Bullion Associations expects gold imports to fall to 20-25 tonnes from 55-60 tonne in the same month of last year due to high gold prices in the rupee.

The government has not intervened much to contain the rupee appreciation. Hence gold is expected to lie at these levels.