Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Will Powell’s Put Support Gold?

Commodities / Gold & Silver 2019 Jan 10, 2019 - 03:48 PM GMT

By: Arkadiusz_Sieron

Commodities

Fed signals more patience with its monetary tightening, despite strong economy. Why? And what does it mean for the gold market?

Minutes from December FOMC Meeting and Gold

As everybody knows, in December the FOMC voted unanimously to raise interest rates for the fourth time in 2018. We have analyzed the implications of that hike for gold in two editions of the Gold News Monitor (here and here).

However, yesterday, the Fed published the minutes of its latest monetary policy meeting. The document shows that despite the apparent unanimity, the tensions were growing, as a “few” officials were actually arguing for the central bank to pause:


In their consideration of monetary policy at this meeting, participants generally judged that the economy was evolving about as anticipated, with real economic activity rising at a strong rate, labor market conditions continuing to strengthen, and inflation near the Committee's objective. Based on their current assessments, most participants expressed the view that it would be appropriate for the Committee to raise the target range for the federal funds rate 25 basis points at this meeting. A few participants, however, favored no change in the target range at this meeting, judging that the absence of signs of upward inflation pressure afforded the Committee some latitude to wait and see how the data would develop amid the recent rise in financial market volatility and increased uncertainty about the global economic growth outlook (emphasis added)

Another dovish signal was the addition of the word “some” to the post-meeting statement. As we have already analyzed in December, the Committee said last time that “some further gradual increases” in the federal funds rate will be appropriate. The minutes confirm our explanation, saying that the FOMC added the word “some” to indicate that “the Committee judged that a relatively limited amount of additional tightening would likely be appropriate”.

In other words, the Fed become more dovish, or, in the Fed speak, patient:
many participants expressed the view that, especially in an environment of muted inflation pressures, the Committee could afford to be patient about further policy firming. A number of participants noted that, before making further changes to the stance of policy, it was important for the Committee to assess factors such as how the risks that had become more pronounced in recent months might unfold and to what extent they would affect economic activity, and the effects of past actions to remove policy accommodation, which were likely still working their way through the economy (emphasis added)

This is good news for the gold bulls. However, has the Fed’s stance changed permanently? What were the reasons behind the decision to hit more dovish tons?

Mystery Behind Dovish Turn and Gold

You see, the Fed’s softer tone is not so obvious. After all, the economy remains strong – and the FOMC admitted it:

In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in November indicated that the labor market had continued to strengthen and that economic activity had been rising at a strong rate.

To reiterate, the FOMC wrote it explicitly that “the economy had been evolving about as they had anticipated at the previous meeting”. The labor market conditions “had remained strong, while inflation was expected to “remain near the Committee's symmetric 2 percent objective on a sustained basis.” And risks to the outlook remained “roughly balanced”.

In other words, nothing changed, but – despite all these talks about being data dependent – the Fed become more dovish. Why? There are two possible explanations. First, the US central bank got scared by Trump. We hope that this is not case, but we cannot exclude it. However, if President exerted some pressure on Powell, we would probably see it much earlier. Anyway, any weakening of the central bank’s independence should be positive for the gold market, as it would imply more inflationary policy – and gold is seen as an inflation hedge.

Second, as Greenspan, Bernanke and Yellen before him, Powell also capitulated to the Wall Street. Why do we think so? Well, the US stock prices fell 8 percent in the period between November and December FOMC meetings. Hence,

agreed that financial markets had been volatile and financial conditions had tightened over the intermeeting period, as equity prices declined, corporate credit spreads widened, and the Treasury yield curve continued to flatten.

What is important, it was the only bad development happening in the economy (together with some slowdown in the growth of foreign economies). Actually, the FOMC members acknowledged the divergence between the strong economic fundamentals and turmoil in the financial markets:

In assessing the economic outlook, participants noted the contrast between the strength of incoming data on economic activity and the concerns about downside risks evident in financial markets and in reports from business contacts.

When forced to choose, the Fed decided that signals from financial markets are more important than from the real economy. Just see that paragraph:

After taking into account incoming economic data, information from business contacts, and the tightening of financial conditions, participants generally revised down their individual assessments of the appropriate path for monetary policy and indicated either no material change or only a modest downward revision in their assessment of the economic outlook

This is what we call Powell put. At the beginning of his term, Powell seemed to be determined to end with the Fed’s reaction function which does not allow for substantial market correction. But we see that he lost the battle. His victory was the hike in December, despite the dissenters. We mean that Powell probably convinced these “few” participants who opted for a pause to a hike, but only in exchange for slower tightening cycle in 2019.

Implications for Gold

What does it all mean for the yellow metal? Well, the minutes from the December FOMC meeting showed a dovish tilt among the Committee. The Fed signaled that it could be more patient, which was later reiterated by Powell during his Friday’s speech at the American Economic Association and Allied Social Science Association annual meeting in Atlanta, as well as by other FOMC members.

More dovish Fed should support the gold prices. Yesterday, they increased, indeed, as one can see in the chart below.

Chart 1: Gold prices from January 7 to January 9, 2019.


However, when financial markets calm down, the Fed may again become more hawkish. Given the current very bullish sentiment towards gold, the correction is not unlikely after some time. The beginning of the year is usually good for the bullion, but that rally does not last long, it often ends in March. We believe that eventually economic fundamentals will outweigh the financial volatility. When the dark clouds over the outlook clear up, the Fed may surprise markets on a hawkish side (they price in no interest rate hikes this year, which may not realize, actually). Gold investors should be prepared and always look through the current volatility.

Thank you.

If you enjoyed the above analysis and would you like to know more about the link between the U.S. economy and the gold market, we invite you to read the August Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron

Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules