2011-09-23

Gold price and other dollar-denominated asset classes posted steep losses

The gold price tumbled $45.91, or 2.6%, to $1,736.44 Friday morning amid significant weakness in financial markets across the globe. Silver plunged alongside the price of gold, by $2.61, or 6.6%, to $37.01 per ounce. U.S. markets were set to open with large losses, as S&P 500 futures dropped 30.00 points to 1,125.75. In addition to disappointment stemming from yesterday’s Fed meeting, a weaker than expected report on the Chinese economy helped fuel the selling. HSBC’s preliminary China Manufacturing Purchasing Managers’ Index, or “flash” PMI, slid to a two-month low of 49.2 in September, below the 50 level separating expansion from contraction.

The gold price and other dollar-denominated asset classes posted steep losses after the Ben Bernanke-led Fed chose to extend the average maturity of its holdings of U.S. Treasuries, also known as Operation Twist. Under the terms of the plan, by June 2012 the Fed will purchase $400 billion in Treasuries with remaining maturities of 6-30 years and will sell an equal amount of Treasuries with remaining maturities of no more than 3 years. The primary goal of Operation Twist is to further reduce longer-term interest rates in the hopes of more effectively stimulating the economy – particularly the housing market.

Other noteworthy items from the Fed announcement included the addition of the word “significant” to “downside risks to the economic outlook.” In addition, the Fed chose not to lower interest on excess bank reserves – another easing measure that many economists expected Bernanke to consider. The central bank also chose to begin reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities in order to “help support conditions in mortgage markets.” In the same fashion as the August FOMC, the Fed’s easing measures were met with three dissenting votes – from Presidents Fisher, Plosser, and Kocherlakota –” who did not support additional policy accommodation at this time.”

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