Fed Statement Yields Inevitable Effect On Gold

The statement issued after the FOMC meeting today reflected pretty much conditions in the U.S. economy as seen by a large cross section of economists, investors and traders.

The slowdown in the first quarter was due to transitory influences.

The two-day meeting concluded a few hours after the Commerce Department reported the U.S. economy grew at a 0.2% annual rate in the first quarter. It was the worst performance in a year, fraught with evidence of a slowing trade sector and spotty business investment.

The statement reflected slowing growth in employment, inflation, business activity and a slightly weaker consumer sentiment reading.

While it’s not the time to point fingers, Europe, China and Japan have not been full partners in stimulating their economies in the wake of the Great Recession.

Two factors present in the 2015 slowdown that were not important during the 2014 winter slowdown are low crude prices and the significantly stronger dollar. Both damage the economy, though in different ways.

Lower crude inhibits investment and employment in the energy sector. A robust dollar pushes prices for American-made goods up and pushes U.S. inflation down. We shall see how long those conditions last.

The bottom line is that the Fed is going to hold off on raising near-zero interest rates until there are more impressive economic indicators.

Counter-intuitively, gold in regular trading fell while a weaker dollar helped limit those losses. One would normally think that the promise of continued low interest rates would prompt investors to move toward the precious metals. (Hints of higher interest rates would push investors away from gold.)

Tomorrow or Friday will be another story. Analysts will reconnoiter, revise thinking and change their recommendations. Investors will follow.

One item on analysts’ minds will be the removal of any calendar references in today’s Fed statement. In short, that means that the Fed is saying that no hike will come soon but that when it comes, it may be a surprise. It is an odd omission and one of the tealeaves that will demand reading.

FX trading bears a brief examination today. The dollar is down almost 1.25% against the euro today. This, of course, helped to moderate the drop in gold prices. Looking beyond that, however, a dropping dollar may very well stimulate American exports once more. A lower dollar also helps raise consumer prices.

Those two movements might, if they happen quickly enough, impel the Fed to raise rates sooner – still meaning September – rather than later. That would put downward pressure on the price of gold.

Wishing you as always, good trading,