'Shock and awe' it wasn't. Though long awaited by global investors, the Federal Reserve's second round of quantitative easing generated a decidedly muted reaction in commodity markets. After the move, the Reuters/Jefferies CRB index of 19 major commodities settled flat at 305.07 late Wednesday.
Why the lack of excitement? Consensus expectations called for the Fed to announce asset purchases of $500 billion or more. What materialized was a commitment to buy an additional $600 billion in long-term Treasury bondsby the middle of next year. But this would work out to about $75 billion a month, which was a smaller monthly amount of new purchases than many analysts had expected. The U.S. central bank said it could adjust purchases depending on the strength of the recovery.
Commodity analysts said the move had largely been built into prices, which had run up sharply since August primarily under the influence of the weaker dollar as investors priced in more accommodation from the Fed. The CRB Index struck a two-year high of 304.98 on Tuesday and gold tells a similar story - the precious metal gaining nearly 4 percent last month and hitting a record $1,388.10 an ounce on Oct. 14.
"I feel the impact of the 'shot' was not powerful enough due to the drawn out process of the stimuli," said Jonathan Barratt, Managing Director of Commodity Broking Services in Sydney. "The market will probably take this as a sign that the Fed is endorsing their policy towards a weak U.S. dollar."
Spot gold had been a major beneficiary of dollar weakness as hopes grew for more quantitative easing. Prices fell as low as $1,323.64 an ounce on Wednesday after the Fed announcement but the metal recouped its losses towards the close.
"Our view is that the weakness in gold immediately following the Fed announcement was mostly profit taking as some traders pared long positions that they have accumulated in the lead up as they rode the rumors of more dramatic Fed action," said Ben Westmore, Economist - Australia & Commodities at National Australia Bank.
"In terms of dollar debasement, there is no doubt that the inverse relationship between gold prices and the dollar has once again asserted itself on this market," he said. "We think there could be some more dollar weakness to come, supporting dollar denominated gold prices in the next six months."
In the Asian session Thursday, the dollar remained close to a 28-year low hit against the higher-yielding Australian dollar after the Fed decision and not far off a 10-month trough against the euro at $1.4200, Reuters reported. The dollar index, a gauge of its performance against a basket of currencies, eased 0.1 percent to 76.31, just above its 2010 low set in October at 76.144.
NAB's Westmore added that the fundamental picture for gold remained strong. Robust investment demand, continued demand from central banks in the developing world combined with stronger jewelry demand in 2011 should "institute a floor under the gold price around the $1,200 level."
Lawrence Eagles, Global Head of Commodities Research at JP Morgan, said the bull market in gold "has been about preservation of value in the face of financial and inflation risks for the past two years."
Oil, meanwhile, "has largely been driven by the prospects for supply and demand," Eagles said. "At this point, I would still argue that it is the stronger growth potential for emerging market economies and a tightening physical market rather than future inflation risks that are driving oil prices."
Mike Sander at Sander Capital Advisors said although the Fed move "was baked into current prices with the Dow Jones only gaining modest ground," crude oil futures hit a fresh six-month high "indicating higher prices are going to occur."