Precious metals turn pale following Fed's decision

Federal Reserve stands pat on monetary policy

Precious metal prices ended substantially lower on Wednesday, 01 August 2012. Prices fell after the Federal Reserve left interest rates unchanged and maintained that it sees interest rates low through late-2014. Prices had started its slide on Tuesday, as investors began to worry additional stimulus efforts by central banks in the U.S. and Europe this week were not forthcoming.

Gold for August delivery fell $6.8, or 0.4%, to end at $1,603.7 an ounce on the Comex division of the New York Mercantile Exchange on Wednesday.

On Wednesday, silver prices for September delivery fell 38 cents (1.4%) to end at $27.54.

A cautious Federal Reserve on Wednesday said the economy was weaker but stood pat on monetary policy. The lack of action from Fed was a surprise. Market had expected the Fed to push out its pledge to hold its benchmark federal funds rate exceptionally low. Instead the Fed repeated that it would likely hold that rate steady until late-2014.

The Fed left unchanged its benchmark federal funds rate target at zero to 0.25%, the level it has been at since December 2008. U.S. stocks dropped in the immediate aftermath of the Fed decision.

The central bank downgraded its view on the economy, saying that economic activity had decelerated. Previously the Fed had said that the economy had been expanding moderately. Since the recession ended in the summer of 2009, the economy has sputtered along with the unemployment rate stuck above 8%.

In the currency market on Wednesday, the dollar index, which weighs the strength of the dollar against a basket of six other currencies, rose by 0.1%.

Generally, a stronger dollar pressures demand for dollar-denominated commodities, such as crude oil and gold, which become more expensive for holders of other currencies and also vice versa. But bullion metals have registered increase in prices despite strong dollar in recent times and vice versa.

Among economic data expected for the day at Wall Street, economic data was mixed this morning with ADP Employment Change surprising to the upside while the ISM Index and construction spending disappointed. The ADP National Employment Report indicated employment in the nonfarm private business sector rose 163K in July. This was above the 125K expected by the consensus. In addition, the previous month's reading was revised down to 172K from 176K.

The July ISM Index came in worse than expected at 49.8 vs. the 50.1 consensus estimate, and up slightly from June's 49.7 reading. June Construction Spending rose 0.4% month over month vs. the 0.9% expected.

At the MCX, gold prices for October delivery closed lower by Rs 185 (0.61%) at Rs 30,014 per ten grams. Prices rose to a high of Rs 30,175 per 10 grams and fell to a low of Rs 29,922 per 10 grams during the day's trading.

At the MCX, silver prices for September delivery closed lower by Rs 802 (1.5%) at Rs 53,172/Kg. Prices opened at Rs 53,900/kg and fell to a low of Rs 52,662/Kg during the day's trading.

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