Gold prices are well off their lows hovering near $1,600 an ounce as the New York Federal Reserve pumped massive liquidity into the financial system.

U.S. equity markets were looking at their worst one-day selloff since the 1987 market crash before the New York Federal Reserve announced that it would conduct a $500B 3-month repo operation. The regional central bank also said that it will also expand Treasury purchases beyond bills -- that's fresh QE.

"That's a big number. It's good the Fed is on the ball, but it also suggests there are major liquidity strains.," said Adam Button, managing director of "This needs a bit of perspective. The Fed's balance sheet in 2011, after two years of QE, was $2.1 trillion. They're doing $1.5 trillion in one shot here. Now, this is a bit different because the vast majority of it is short term.

Button added that the risk in the latest Fed move could signal another panic among investors.

"Is something breaking down in banking due to the speed of the breakdown in markets," he said.

Many analysts say the Federal Reserve's emergency inter-meeting 50-basis point cut as a panic move and it was unable to calm markets.

Paul Ashworth, chief U.S. economist described the New York Fed’s announcement as launching monetary policy “bazooka.” He added that he sees more easing to come next week.

“If markets take the Fed up on all the funding being offered, its balance sheet would increase by $1,500bn to a record high of more than $5trn,” Ashworth said. “The next step would be to expand the pace of monthly purchases, which we think the Fed will probably do at next week’s FOMC meeting. Finally, while we still expect “only” a 50bp rate cut next week, the fact that the Fed is already dabbling in QE again makes it even clearer that it anticipates returning rates to their pre-crisis near-zero levels soon.”

Following the announcement, gold prices have rallied nearly $25 off its lows. April gold futures last traded at $1,595.5 an ounce, down 2.85% on the day.


Meanwhile, the Dow Jones Industrial Average, which was facing its biggest daily drop in more than three decades, has also bounced off its lows and is down 5.66% on the day.

Market analysts have noted that the market meltdown is creating a massive liquidity crisis and investors are forced to sell their gold to cover margin calls in equity markets. However, the analysts have noted that once market volatility calms down, the central bank monetary policy will propel gold prices higher.

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Very informative
05-03 04:23 by Liam
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