David Morris
ANYONE hoping that last week’s FOMC statement would help to calm markets has been bitterly disappointed. On Wednesday, the US Federal Reserve announced that it plans to sell $400bn of short-term debt and buy $400bn of longer-dated Treasury bonds. This operation is designed to put a lid on longer-term interest rates while keeping the size of the Fed’s balance sheet unchanged. While this was pretty much as expected, the plunge in stocks, oil and precious metals shows that investors were hoping for more. An additional round of outright asset purchases would have sent the dollar lower while putting a floor under stock and commodity prices.

The Fed chose to keep its powder dry for now, and the next FOMC meeting is in early November. But rather than assume that additional quantitative easing has simply been postponed for six weeks, investors now fear that the Fed is anxious to keep something in reserve in anticipation of further economic shocks. There were also concerns that three members of the FOMC voted against the monetary policy action saying that they didn’t “support additional policy accommodation at this time.” These are the same members who dissented against the August decision to announce that the federal funds rate would be kept low until mid-2013 at the earliest.

So the markets got what they expected, but not as much as they hoped. Equities fell sharply, giving back all the gains made in the run-up to the FOMC statement. But the biggest shock has been the collapse in precious metals. The initial sell-off could be explained as a reaction to the soaring US dollar. As the Fed wasn’t about to print money to purchase Treasuries, the greenback flew higher, undermining dollar-denominated commodities. But the selling turned into a rout as leveraged investors bailed out of their long positions. Gold and silver were caught up in the de-risking as investors sold indiscriminately in a desperate rush to raise cash.

There is plenty of anecdotal evidence that demand for physical gold and silver is strong. But chart-wise, many significant support levels have been smashed. While owners of the physical metals can take this volatility in their stride, many leveraged buyers will wait until they judge that selling has reached exhaustion point.