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Gold Price Drop "Suggests Fed Could Cut QE"

THE FALL in the gold price that began ahead of the publication of Federal Open Market Committee minutes Wednesday was triggered by concerns that the Federal Reserve could end its ongoing quantitative easing program sooner than previously expected, several analysts have suggested.

Gold priced in Dollars fell through $1600 an ounce for the first time since August ahead of the minutes' publication, going on to hit an eight-month low at $1556 Thursday morning.

Last September, Fed policymakers committed to buying $40 billion of agency mortgage backed securities each month. In December, the Fed added that it will also make monthly purchases of $45 billion of US Treasury bonds.

Wednesday's minutes however, which relate to the FOMC meeting at the end of January, state that "several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved".

"What it suggests," says UBS Global Commodity Analyst Tom Price, "is that the quantitative easing programs that the US Fed is presiding over which are potentially inflationary, could be cut. That means that primary driver inflation is just not there to support the gold price."

The US Dollar Index, which measures the Dollar's strength against a basket of other currencies, rose to a three-month high following the publication of the minutes.

"What is really hurting gold," adds UBS's Price, speaking Thursday to India's CNBC-TV18, "is the strong, steady macroeconomic data coming out of the US which, of course, creates upside risk for the US Dollar and a scenario like that is bearish for gold."

Following its December meeting, the FOMC statement said that the federal funds rate, the Fed's main policy interest rate, is expected to stay in its exceptionally low range of between 0% and 0.25% "at least as long as the unemployment rate remains above 6.5%".

Wednesday's FOMC minutes however "suggest a shift in mentality within the US central bank," says a note from Commerzbank commodity analysts.

"This could mean that the volume of bond purchases could already be reduced from mid-year, regardless of the recovery of the US labor market."

The FOMC minutes also noted however that "several [members] argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred."

"US rates markets did not react as aggressively to the minutes [as the gold price]," adds a note from ING, "suggesting that these comments came from the less dovish dissenters who have little sway over the Bernanke FOMC."

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