Gold price bounces off near 6-year lows in continued aftermath of Fed decision

December 18, 2015

New York (Dec 18)  Gold bounced on Friday off near six-year lows, erasing severe losses from a massive sell-off from the previous session as investors continued to digest the Federal Reserve's historic decision to lift interest rates  from record-lows earlier in the week.

On the Comex division of the New York Mercantile Exchange, gold for February delivery traded in a broad range between $1,050.30 and $1,070.60 an ounce before settling at $1,065.00, up 15.40 or 1.47% on the session. A session earlier, gold futures slid by $25 an ounce in one of their worst sessions of the year, retreating back toward levels not seen since 2009.

During a choppy, volatile week of trading, gold fell by approximately 1%. The precious metal has now posted weekly declines in eight of the last nine weeks, dating back to mid-October. For the year as a whole, gold has tumbled more than 10%, down sharply from its yearly-high around $1,300 in early-January.

Gold likely gained support at $1,046.20, the low from December 3 and was met with resistance at $1,134.70, the high from Nov. 3.

Citing improved labor market conditions and expectations that long-term inflation would move toward its targeted goal of 2%, the Federal Open Market Committee (FOMC) raised short-term interest rates on Wednesday for the first time in nearly a decade. In a unanimous vote, the FOMC lifted the target range on its benchmark

Federal Funds Rate by 25 basis points to a level between 0.25% and 0.50%. The Fed Funds Rate is the rate offered by institutions on overnight, interbank loans at the Federal Reserve Bank of New York.

Commodity traders had nearly a month to price in a rate hike after the Fed began to telegraph the move in early-November following a robust U.S. national employment report.

The beginning of the Fed's first tightening cycle since The Great Recession has been largely viewed as bearish for gold, which struggles to compete with high-yield bearing assets in higher rate environments.

In order to manage the Fed Funds Rate effectively, the U.S. Central Bank is implementing a pair of levers to help maintain the rate near its target. The Fed's new cycle began on Thursday when the New York Fed initiated the Overnight Reverse Repurchase Program (RPP) on its Open Market Desk. The tool intends to bolster loan demand, as the Fed borrows cash overnight from institutions in exchange for U.S. treasuries at a rate of 0.25%.

At the same time, the Fed raised the target rate offered on excessive reserves held by banks at the New York Fed to 0.50% as part of its monetary policy decision. In effect, the payments on reverse repurchases or reverse repo's will serve as a floor for the program, while the interest on the excessive reserves is intended to act as a ceiling.

On Thursday, the Average or Effective Federal Funds Rate traded in between 0.25 and 0.59%, according to data from the Federal Reserve, up from 0.08 to 0.55% a day earlier. The Effective Fed Funds Rate is the rate which the FOMC targets to reach its objective. It marked the highest top end level of the Fed's benchmark rate since November, 2011. The rate on excessive bank reserves also averaged 0.37% in Thursday's session, up from 0.15% in the prior day of trading.

In total, $105 billion of overnight RPP trades were made at the New York Fed's desk on Thursday, according to Fed data. The desk anticipates that approximately $2 trillion of Treasury securities will be made available for overnight RPP operations in order for the Fed to satisfy its objective, the New York Fed said in a statement. A contingent of roughly 125 institutions consisting of Banks, Government Sponsored Entities (GSEs), Money-Market Funds and Investment Managers are listed as overnight RPP counterparties on the New York Fed's website.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell by more than 0.30% on Friday morning to an intraday low of 98.72. The index eclipsed 100.00 at the start of December to reach a 12-month high.

Dollar-denominated commodities such as gold become more expensive for foreign purchasers when the dollar appreciates.

Silver for March delivery surged 0.422 or 3.08% to 14.125 an ounce.

Copper for March delivery soared 0.068 or 3.34% to 2.112 a pound.


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