Crude, Gold to fall if QE3 expectations misplaced

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Crude oil and gold prices are likely to fall as risk appetite sours and the US Dollar gains if minutes from March’s FOMC outing dents the probability of QE3.

Commodity prices are looking to the release of minutes the March Federal Reserve policy meeting for direction over the coming 24 hours. Broadly speaking, the outcome seems likely to reflect the relatively upbeat tone of the policy statement while reiterating a commitment to press on with accommodative monetary policy, which increasingly looks like a reference to the pledge of near-zero rates through late 2014 rather than additional non-standard measures.

With this in mind, the report’s market-moving potential will be found in any discussion of the various policy options open to the Federal Reserve in the event that additional easing is needed. Specifically, markets will want a gauge of how high the bar for triggering a third round of asset purchases has been set and what preliminary steps can be taken (like an extension of “Operation Twist”, so-called “sterilized QE”, and so on) before the Fed decides to embark on such a course.

Simply put, traders will want to get a sense for the likelihood of a QE3 program and the environment needed to produce it. If officials’ commentary is judged to signal that another expansion of the balance sheet is relatively likely, growth-sensitive copper and crude oil prices are likely to advance. Such an outcome also stands to weigh on the US Dollar, boosting gold and silver as alternatives to paper currency. Alternatively, a sense that QE3 is fading as a probable turn for Fed policy is likely to produce the opposite result.