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Directionless Fed Pressures Gold

NEW YORK ( TheStreet) -- In commodities markets this week, all eyes are focused on Federal Reserve Chairman Ben Bernanke.

Investors in gold and other precious metals are looking for clues to determine the next likely direction in U.S. monetary policy. This has been a difficult task of late, given the conflicting messages sent by various members of the central bank. Clearly, there are dissenting views at the Fed with some members taking on a more supportive stance to extend the time frame of economic stimulus while others have suggested there are unintended consequences to these programs and that they should be phased-out.

Unfortunately, Bernanke's initial comments have done little to clear-up this confusion. The Fed chief's semi-annual testimony before Congress produced directionless statements that account for all possible scenarios and favor none. Specifically, Bernanke said that the quantitative easing programs "are by no means on a preset course."

In the most upbeat scenario, consistent gains would be seen in the labor market and consumer inflation would move toward the Fed's target rate of 2%. In this case, Bernanke has said that "the pace of asset purchases could be reduced somewhat more quickly."

Alternatively, the pessimistic scenario would include elements like an elevated unemployment rate (as the Fed's target of 6.5% is still far below current levels). Here, Bernanke hinted that the Fed might be willing to increase stimulus for short periods of time in order "to promote a return to maximum employment in a context of price stability."

Essentially, Bernanke is telling the market that the Fed is leaving all options on the table and that there is no underlying bias for the next direction in policy settings. But while this dependence on future data might seem like an even-handed, prudent approach to dealing with the economy, it does little to guide investors or financial markets as a whole. Of course, this is not the Fed's job but the added uncertainty is putting downside pressure on certain asset classes.

For gold investors, it is important to note that total holdings in GLD have dropped to their lowest levels since the beginning of 2009 (to roughly 935 metric tons). With demand weakening and gold ETFs seeing renewed liquidation, we will need to see a strong physical market in order to support valuations in the yellow metal.
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