Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Will Powell Cutting US Interest Rates Triggering Gold Price Rally?

Commodities / Gold & Silver 2019 Jul 25, 2019 - 01:42 PM GMT

By: Arkadiusz_Sieron

Commodities

Yesterday we wrote about Draghi, so today Powell is our hero. Only one week separates us from the pivotal FOMC meeting. What should gold investors expect?

First Fed Cut Since 2008

In a week, the Fed may deliver its first interest rate cut since 2008. Given the market odds, the move is practically a foregone conclusion. Futures traders assign a 100-percent probability of a cut. The bone of contention is the size of the reduction: there are 76.5-percent chances of a standard 25-basis point cut and 23.5-percent odds of a 50-basis point slash. As Powell did nothing to alter these expectations, the U.S. central bank now has to deliver a cut, if it does not want to upset the financial markets. However, the 50-basis point reduction sounds be a bit too much. The economy is not yet in recession, and you do not fire a bazooka as an insurance just in case!


The FOMC’s asymmetric approach should be now clearly seen. It took six years since the end of the Great Recession for the Fed officials to start the normalization process. And did they returned to the pre-crisis position? Of course not! They managed to lift interest rates just to 2.4 percent, less than half of the 5.25 percent present before the financial crisis, as the chart below shows. Not to mention the still giant Fed's balance sheet! The Fed’s dovish bias should be now obvious for everyone, and that’s not too bad for gold, actually.

Chart 1: The effective federal funds rate from 1971 to 2019.

What is not so obvious is why the FOMC is going to cut the federal funds rate, as the macroeconomic targets the Fed is supposed to hit, do not justify such an aggressive move. It might be the case that we were right commenting that the Fed’s hikes were terribly delayed. They simply did not have the time to normalize the interest rates completely before the economic outlook darkens. So far, we experience just a global economic slowdown, but the inversion of the yield curve signals recession in a few quarters from now. And the Fed knows it.

Fed’s Cut and Gold Prices

So far, the Fed’s dovish shift was beneficial for gold. The soft rhetoric and the reduction in the projected path of the federal funds rate helped gold above $1,400. But how will the actual cut affect the gold prices?

It’s not an easy question. The last round of cuts from 2007-8 was bullish for the gold prices, but the yellow metal was already in the middle of the bull market. As the chart below shows, the previous cuts (before 2007) were not always supportive (or only with a substantial lag) for the yellow metal.

Chart 2: The effective federal funds rate (red line, right axis, in %) and the gold prices (yellow line, left axis, London P.M. Fix, in $) from 1971 to 2019.

So, if the rate cuts history does not provide a clear guide for the gold prices, let’s analyze the last tightening cycle. When the Fed was hiking interest rates, the pattern was clear. Gold struggled in anticipation of the hike at the FOMC meeting, but rallied after the actual hike. The argument a contrario would be that the gold prices rallied in anticipation of the interest rate cut at the FOMC meeting, but they will fall after the actual cut.

That’s possible, but there is one issue here. You see, gold rallied after the Fed’s actual hikes because these hikes were accompanied by the dovish projections. The Fed was hiking interest rates but at a much slower pace than anticipated by investors. The U.S. central bank was systematically reducing its estimates of the long-term level of interest rates, postponing or excluding some of the future hikes. But this time the Fed’s action might not be accompanied by the opposite signal. The dovish cut might come in tandem with some dovish signal about Fed’s future stance, which should serve gold well. A single interest rate cut would be very uncommon.

Of course, what matters here, is the reality versus the expectations. Investors expect three interest rate cuts overall this year. The Fed might dampen these overly dovish expectations in a week, which could be a really cold shower for the gold bulls. One or two cuts are more probable. But Powell and his colleagues have not tried so far to rein in the dovish hopes, so it’s far from certain that they will do so in a week. We will see.

Looking at the fundamentals alone, the end of the tightening cycle and the beginning of a fresh easing cycle are supportive factors for the gold prices, especially in the current environment of low real interest rates. Of course, we’ll learn shortly just how serious the Fed is about its further easing plans – that will give hue to the above assumption.

If you enjoyed the above analysis, we invite you to check out our other services. We provide detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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

© 2005-2022 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