Gold Price Drops on Fed's 'Operation Twist'

Gold prices plummeted more than 4 percent Thursday after the Federal Reserve pronounced the economy seriously ill, but then prescribed what the markets saw as little more than aspirin.

After a two-day meeting the Fed on Wednesday said in a statement there are significant downside risks to the economic outlook, including strains in global financial markets. It was one of the most downbeat assessments of the economy in several years and reinforced fears that the U.S. was headed into a double-dip recession -- and needed strong action.

In response to the increasing economic weakness the central bank said it would extend the maturity of the bonds it holds, reinvest principal payments in securities that support the housing market and keep the interest rate banks may charge one another for overnight loans at or near zero.

Within minutes of the Fed's announcement, global stocks started falling, as did the euro and precious metals. The dollar and Treasuries rose, with interest on the 10-year note coming close to the record low of 1.877 percent set earlier this month. Bond interest rates move in the opposite direction of bond prices.

By early Thursday stocks were farther down: European exchanges were off as much as 5 percent and U.S. stocks were set to open sharply lower. Gold at one point in electronic trading on the New York futures exchange was off more than 4 percent.

Analysts and traders were struck by the severity of the Fed's outlook, especially in view of the central bank's response.

It seems the market doesn't believe (the Fed's response) is enough to kick start the spluttering economy ... (and) a very downbeat outlook ... seems to have unsettled markets even further, Ben Potter, market strategist at IG Markets, told Reuters.

Joe Carson, director of global economic research at AllianceBernstein LP, agreed: It (the Fed's response) will have a very minor impact on activity because our economy is not being hurt by high interest rates, Carson told Newsweek.

Gold in electronic trading was down $61.80 to $1,746.30, while gold for immediate delivery was off $13.73 to $1,739.70.

Silver in electronic trading was down $3 to $37.47, and silver for immediate delivery was off 82 cents to $37.27.