) --The Federal Reserve Open Market Committee made it clear on Tuesday that the central bank isn't about to rush to the dollar printing press with another round of quantitative easing, but there is a difference between killing softly and burying the gold trade.

Since the central bank easy money policy was put in place in response to the financial crash, volatility has typified the gold trade. However, in giving the market no reason to believe QE3 is around the corner, the Fed didn't change course. Speculative traders keeping the gold bubble afloat simply expected too much, and too soon, in terms of Fed action.

Consider that just last week when Federal Reserve Chairman Ben Bernanke spoke at an industry conference the markets interpreted his benign words as a wink and a nod that QE3 was on the way. What a difference a week makes. When the commodities trade, specifically, is positioned on a prayer that central bank policy creates inflation that is a danger, said Jon Nadler, senior metals analyst at Kitco.

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"The gold trade is not dead and buried," Nadler said, "but this does show how much of the house of commodity cards is built on pure and simple anticipation, not only of more give from the Fed but that QE would blossom into some inflationary type of mushroom cloud."

The markets seem to conflate any "Fed speak" about accommodative policy -- which could simply refer to keeping interest rates at zero for years -- such as occurred last week, with a green light on QE3.

With the QE accelerator now idling, gold may test trading support levels that take it much lower -- making it a dangerous trade on any simplified "buy on the weakness, QE is still coming" philosophy.

Gold fell to the $1640 an ounce-range on Tuesday, but near-term, downside risk is all the way to $1200 to $1300. Beyond that, Nadler noted that one of the problems with gold is the fuzzy math that is the basis for its valuation. There is no absolute metric, so with mining production costs at $630 an ounce, gold could ultimately be overpriced by almost 50%.

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"If and when it falls to the $1250 to $1400 range, we can say the peak was solidly in and we will be going into some other market than this different species of bull market for gold we've seen," Nadler said.

Nadler sees a potential return to gold as a safe haven, core portfolio holding negatively correlated with equities, rather than as a trade.

"Gold could perhaps be entering a two- to three-year period of sideways to negative returns, not just because the macro environment is shifting against negative real interest rates, but because the battleship of the Fed is turning too," Nadler said.

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If the Fed is the reason this question is being asked, the focus on the Fed's QE3 deliberations is misguided in the first place, according to Bank of America Merrill Lynch economists. QE3 is being contemplated, it's just not going to be on Fed's radar until later in 2012.

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There is a belief in some market camps that the Fed will be compelled to roll out QE3 when its bond buying Operation Twist program ends in June. Indeed, after the Fed's QE3 dispelling comments were released on Tuesday afternoon,

Bloomberg TV

displayed a prediction first made earlier this year by Goldman Sachs U.S. economist Jan Hatzius that QE3 will be launched in June, and kept the Hatzius prediction at the bottom of the screen for an extended period of air time.

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The Fed does not have to "ease" seamlessly, though, if the U.S. economy is holding steady.

"Our view since late last year has been it's coming, but not until the fall," said Ethan Harris, Bank of America Merrill Lynch economist. "Frankly, I don't know why we are talking about it now. Bernanke has been very consistent in waiting to see clear signs of an economic stall and then using QE to correct the course," the economist said.

If QE is not designed to achieve a goal of very strong growth, but to act as an economic tugboat -- the metaphor that Harris prefers over Nadler's battleship -- the only reason for the Fed to chart a seamless course from Twist to some other unconventional policy would be if economic data softened significantly by June.

The latest FOMC minutes only indicate that the Fed is more confident about near- term growth, and Harris said the economic picture will change in the fall. "The big story of the fall will be the fiscal cliff," Harris said. The fiscal cliff concept is gaining more mainstream attention.

In a recent op-ed for

The Wall Street Journal

, Princeton economist Alan Blinder noted that inability by Congress to reach permanent agreement on extending the Bush tax cuts, the two-point reduction in the payroll tax, and long-term unemployment benefits, are leading to one more late year face-off, and during an election year. On top of this, the failure of last year's debt super committee means automatic tax increases and spending cuts that could shave 3.5% off of GDP could be coming in 2013.

"It will be a worse version of last August's debt ceiling debate, last August multiplied by three," Harris said. Last August marked a high for the gold trade.

The Bank of America Merrill Lynch economist said the Fed isn't incorporating the fiscal cliff into its forecast. The fiscal cliff -- combined with high gasoline prices and a slowdown in the the U.S. economy the further away it moves from the mild winter weather "stimulus" -- will lead the Fed to say enough is enough and hit the accelerator it was still far from pressing down on in its latest FOMC commentary.

"QE is coming in the second half of 2012," Harris said.

The gold market reacts to easy money policy and if the fiscal cliff thesis proves true, it will be good for safe-haven flows into gold, and the weakening in the gold trade will ultimately be a function of it being too high, as opposed to it already being started on a long, and straight, road down.

"This is the hot story among clients now. People are starting to question if the economy is really off to the races and the broad based risk aversion trade will be back in the fall," Harris said.

"Will we get easy money or not? At the end of the day, gold investors should ignore it," Nadler said.

Easier said than done, especially with QE3 still on the horizon. It is, isn't it?

-- Written by Eric Rosenbaum from New York.

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