Baked By The Fed

A small taste of haven demand returned to the gold market today. “Why” isn’t perfectly clear, but there are some theories we’ll flesh out. A strong rise in crude prices can be considered an outside bullish influence on the day, as can a blah Friday in equities trading in New York.

QE is about to enter stage left in Europe. Today may have been the last hurrah for the euro’s surprising strength in the current cycle of economic moves. This muddled the picture for the U.S. dollar, which, discounting whether the Fed will raise rates in June, is going to rise as the euro zone plunges into quantitative easing.

That will suppress the euro for a while and make the dollar and yen, (among major currencies), strong haven bets. That can’t be good for gold. It also can’t be good generally for either the continued growth of the U.S. or Japanese economies. However, the bright spot for gold bulls is that a weaker euro and slower U.S. economy due to that will fend off a too-early rate rise by the Fed.

Gold is roughly midway between its highs and lows for the day.

Significantly, an important Fed member checked in today with his opinion on where rates are headed, although he really didn’t exactly add anything spanking new.

Stanley Fischer, vice chair of the Federal Reserve board of governors (a voting member on the Fed's policymaking committee, the FOMC), told CNBC Friday there is a "high probability" of a rate increase this year.

We’re shocked. (Not really.)

He said the U.S. is coming "very close" to achieving a “natural rate of unemployment,” and he predicted that inflation should rise as the effect of low oil wears off "in a couple months."

We’re not sure that oil is going back to the mid-$80 range very soon.

"We've gotten used to thinking of a zero interest rate as normal—it's far from normal," Fischer said.

The central banker also reflected on the Fed's use of the term "patience" in its statements, saying that its removal would indicate "it could happen, depending on the data, at any meeting."  hasn’t that always been true, patience or no patience?

We know that June and September are likely trigger dates, but we also feel there will be a slowdown reported in the first quarter reflective of the awful winter we’ve had in the U.S.

CNBC elaborated on Fischer’s statements:

“Earlier Friday at the University of Chicago's annual U.S. Monetary Policy Forum in New York City, Fischer said that both the Federal Open Market Committee and markets are expecting that the federal funds rate will be raised ‘sometime this year.’ Although he said the Fed's balance sheet size could present a challenge, Fischer explained that he is confident the central bank has the right tools available to hike rates.

One thing we can surely anticipate is that once the rate hike comes, perhaps a quarter of a point, it will already have been baked into the markets, gold included. 

Wishing you as always, good trading,