Gold Holds Steady as Oil Sinks and Equities Struggle

Gold stayed more or less steady as the session and week neared an end. Spot gold was down, but the April futures contract was up. While it’s easy enough to name suspects in today’s maintenance of the status quo in the yellow precious metal’s price, we will cite some real reasons below.

Many are pointing to oil’s fluctuations. Both West Texas Intermediate and Brent North Sea were down about 3.00%. Yet, in spite of oil’s renewed steep decline, (which eased somewhat in mid-afternoon trading), equities are running toward the close relatively unscathed.

The 10-year U.S. Treasury bond yield is unchanged to slightly lower in mid-afternoon dealing and the U.S. dollar was softer against the euro, yen and British pound. That hints at negligible demand for safe-haven instruments.

Now we get closer to what important winds are blowing through markets today.

Rising rental costs and medical costs lifted underlying U.S. inflation in January by the most in 4-1/2 years, signs of an uptick in price pressures that could encourage the Federal Reserve to raise interest rates this year, even if only very slowly.

The U.S. Department of Labor said today that the Consumer Price Index, which excludes volatile food and energy components, increased 0.3% last month. That was the biggest gain since August 2011 and followed a 0.2 percent rise in December.

In the 12 months through January, the core CPI advanced 2.2%, the largest rise since the middle of 2012. Two percent is the Federal Reserve’s inflation target. However, the Fed’s most favored measure, a somewhat broader survey of prices, is still running well below the target.

Inflation is closely watched for clues about potential rising interest rates. We would wager that March is off the table, but if inflation continues to tick up, April or June are good bets. Naturally, anyone in the prediction game will tell you that any committee action will be data dependent.

Now to those with the clout to keep things in focus this week.

Loretta Mester, President of the Cleveland Fed and a 2016-voting member on the Federal Open Market Committee, said this today:

"I continue to monitor developments, but until I see further evidence to the contrary, my current expectation is that the U.S. economy will work through this episode of market turbulence and the soft patch of economic data to regain its footing for moderate growth, even as the energy and manufacturing sectors remain challenged.

Mester acknowledged that energy prices have fallen more than she and others on the committee expected. But she echoed statements from Fed Chair Janet Yellen and fellow committeemen that the trend will change eventually.

"Oil prices cannot continue to decline indefinitely, nor can the dollar continue to appreciate forever," she noted. "At some point, both will regain some stability and the effect of previous changes on inflation will dissipate."

Although he is a non-voting member this year, San Francisco Fed President John Williams said his outlook has scarcely changed since last December. He feels the U.S. economy is strong and parts of the world economy are weak. However, he thinks normalization of rates is crucial to overall banking and credit stability.

The statements by Mester and Williams, when taken with the Fed minutes recently released Chairwoman Janet Yellen’s statements earlier this week and St. Louis Fed President Bullard’s statements yesterday, help us to a more clarified snapshot of where the Fed is coming from.

Not everyone might agree with the narrative in the picture that’s being drawn, but it is absolutely clear.

The Fed is essentially saying that there will be light to moderate headwinds, but clear skies and relatively smooth seas. They also seem to be conveying the opinion that the U.S. economic ship is sound and well-built and will come out of this patch of volatility in good shape.

Wishing you as always, good trading,