Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Does Fed Know Something Gold Investors Do Not Know?

Commodities / Gold & Silver 2019 Mar 21, 2019 - 03:15 PM GMT

By: Arkadiusz_Sieron

Commodities

The Fed doubled down on its dovish stance. What card will gold play now?

Fed Remains Patient

Yesterday, the FOMC published the monetary policy statement from its latest meeting that took place on March 19-20th. In line with the expectations, the US central bank unanimously kept its interest rates unchanged. The federal funds rate remained at the target range of 2.25 to 2.50 percent:

The Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.


The inaction reflected the new patient approach adopted by the Fed in January. The US central bank also noted the slowdown in the US economic growth and some other indicators:

Information received since the Federal Open Market Committee met in January indicates that (…) growth of economic activity has slowed from its solid rate in the fourth quarter. (…) Recent indicators point to slower growth of household spending and business fixed investment in the first quarter.

Apart from these changes, the statement was virtually kept the same as it was in January. So, it should not significantly affect the gold market. However, it was accompanied by the new details about the balance sheet normalization, and the dot plot. Let’s now analyze them.

Slowdown in Balance Sheet’s Normalization

As a result of its previous discussions, the Fed published Balance Sheet Normalization Principles and Plans. The key changes are as follows:

• first, the US central banks slows down the pace of the decline in its holdings of Treasury securities over coming quarters, by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019;
• second, the Fed will end its balance sheet normalization as early as in September 2019;
• third, since October 2019, the Committee will reinvest principal payments received from agency debt and agency MBS in Treasury securities, subject to a maximum amount of $20 billion per month

All these changes mean that the Fed will soften its quantitative tightening. Apparently, the US central bank took heed of all the complaints about the Fed draining liquidity. The party in the risky assets will, thus, go on, which may be bad news for the yellow metal. On the other hand, gold may appreciate in tandem with the stock market. Moreover, more dovish Fed and weaker upward pressure on the interest rates should support gold.

Dramatic Shift in Dot Plot

The second biggest dovish surprise, next to the new Fed’s balance sheet policy, were the fresh Fed’s economic projections. The forecasts for GDP and inflation were slightly down, while that for the unemployment rate slightly up. But the real change was the dramatic shift in the dot plot. The median assessment of appropriate level of the federal funds rate was slashed from 2.9 to 2.4 percent in 2019, and from 3.1 to 2.6 percent in both 2020 and 2021. It means that now the Fed sees no hike this year and only one hike next year. It’s a really remarkable turn, as in just six months, the US central bank has gone from an outlook with interest rates in restrictive territory to a more neutral (some might even say accommodative) positioning. After such abrupt revisions, what kind of credibility does the Fed’s dot plot have left?

Implications for Gold

What does it all mean for gold? Well, the Fed surprised investors on a dovish side. The markets made their moves. While the bond yields declined, the US dollar predictably plunged against both the euro and the Japanese yen, as the charts below show.

Chart 1: USD/JPY exchange rate from March 19 to March 21, 2019

Chart 2: EUR/USD exchange rate from March 19 to March 21, 2019


So, the price of gold jumped. As one can see in the chart below, the yellow metal moved yesterday above $1,315.

Chart 3: Gold prices from March 19 to March 21, 2019.



More dovish Fed is a fundamental tailwind for the gold market. We have been repeating for a long time that the US monetary policy has reached its hawkish peak in 2018 and that this is why 2019 should not be as harsh to the precious metals as 2018 was. There is always a risk in repricing of the Fed’s interest rate path, but unless inflation significantly jumps, we consider it as low. Another risk is that the dovish Fed will support the stock market at the expense of the precious metals market. However, the reaction of the S&P 500 is far from euphoric, as the chart below clearly shows.

Chart 4: S&P 500 Index from March 18 to March 20, 2019.


It may suggest that the Fed’s bold reaction frightened investors. After all, it might be the case that if the US central bank doubles down on a dovish side, when the economy seems solid, it must know something disturbing about the economy the mere mortal does not know. The conclusion is that appeal of holding gold should not decrease – and it may even increase thanks to the lower bond yields and weaker greenback.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April 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

© 2005-2022 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