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March 13: Gold drops on Fed silence, retail sales

Source: American Gold Exchange

Austin -- Gold dropped for a second session while the dollar strengthened behind strong retail sales numbers and silence from Fed about another round of quantitative easing after the FOMC meeting today. Retail sales climbed 1.1% in February, the fastest in five months, and January's sales were revised up to 0.6% in another encouraging sign of recovery. Dow surged more than 200 points and the dollar index rose half a percent as the euro fell nearly 0.7%. The other three precious metals posted gains.

At the close: April gold dropped $5.60 to $1,694.20; May silver added 17 cents to $33.58; April platinum gained $6.10 to $1,701.80; and June palladium rose $4.60 to $708.85 an ounce.

While gold has been tracking risk assets like equities higher in recent weeks, it moved opposite them today as some of the speculative premium left the gold price. The primary driver behind gold's drop was the Fed's silence on quantitative easing. Just like two weeks ago, when Chairman Bernanke testified before Congress and gold lost a quick 4.3%, the markets took the FOMC silence to mean a third round of easing might not be forthcoming. It should be noted that the Fed reiterated its intention to keep zero interest rates in place through late 2014, which is supportive of higher gold. Of course, no one actually expected more easing today; and just ten days ago, FOMC voting member John Williams said QE3 is "definitely not off the table." Nonetheless, today's non-mention, like the last one, was enough to drive speculative long positions out of the market. Last week, hedge funds and other money managers increased their long wagers by 10% to 197,552 futures, the highest level since September 6. Today's correction takes some of that speculative froth out of the gold price, and should be healthy for the gold market going forward.