FOMC Today Means QE3 Watch – Expect Volatility for Gold and Silver

November 2nd, 2011 by

Third quarter U.S. GDP may have been 2.5%, but this is hardly confirmation that the U.S. is heading for sustained economic growth. With U.S. unemployment over 9%, Europe in a ditch, and China showing signs of slowing, there are serious headwinds ahead. While today’s FOMC meeting is not expected to generate any major changes in policy, there is a possibility that another round of buying buying, also known as quantitative easing, could be in the cards. What’s more likely however is language in the FOMC statement that indicates a clear predisposition to embark on QE3 sooner rather than later.

Any results from today’s FOMC meeting will be announced at 12:30. Be prepared for immediate volatility regardless of what the Fed does. This has been a common feature of FOMC meetings, but any indication of QE3, or an actually decision to implement it now would almost assuredly cause a huge rally in risk assets, with a corresponding drop in the U.S. dollar. Several Fed members have indicated their willingness to further drive rates lower by buying hundreds of billions of mortgage backed securities on the open market.

Adding to this week’s excitement is tomorrow’s ECB monetary policy meeting. This is the first meeting with new head Mario Draghi. It is well known that the ECB was not very willing to buy the sovereign debt of Italy and Spain, and given the severity of the ongoing crisis, it will be interesting to see how Draghi pushes future ECB policy. Any indication that he is more willing to do the European equivalent of U.S. quantitative easing would ease concerns that Italy and Spain will require a bailout. At present, yields on Italian 10-year bonds are above 6%, and are near the level at which the ECB was reluctantly forced to intervene to drive Italian yields lower. Of secondary importance will be whether the ECB decides to lower its target interest rate. With Europe’s economy clearly slowing, the room to cut rates has been growing.

For gold and silver buyers, the decision of the Fed and the ECB will definitely impact the direction of both precious metals. Expect volatility over the next 24 hours. Of course, the FOMC and ECB meetings will quickly be followed by the G-20 Summit on November 3-4 and the October payroll data on Friday. All markets, including gold and silver, have much to look forward to.