Gold Reacts Positively Despite Improved Fed Outlook

The opening paragraph of the FOMC’s press release says it all. Our italics indicate the highlights:

“Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May.

“On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months.

“Household spending has been growing strongly but business fixed investment has been soft.

“Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.

“Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.”

Yet, there is a more positive overall tone to the release, expressing almost a sense of relief.

But there is also a lingering overtone of worry. Joseph LaVorgna, chief U.S. economist at Deutsche Bank, said, "However, the Fed has gotten wise to the fragility of markets. They kept in that they're still monitoring financial conditions, so even though many things broke positively for the Fed since their last meeting, they want to be extra cautious."

After some back and forth, gold traders ultimately (for the day, anyway) interpreted the short after-meeting news release as dovish, meaning that rates were staying put for a while longer. Gold at 3:30 in New York was up 1.30%.

Silver, platinum and palladium all roared. Silver is up 3.50%, platinum by almost 4.00% and palladium 2.30%. Ride it like you stole it.

The boiler-plate wisdom runs like this: gold is very sensitive to rising Fed rates, which lift the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced. Leaving rates alone has an opposite effect.

However, we can be certain that in the next three meetings, rates will be raised once, and if inflation ticks up, perhaps twice. It’s possible we will get one rise, but in the 0.50% to 0.75% range.

The Fed is not the only central bank on stage this week. Friday, the Bank of Japan will issue its statement(s) regarding the way forward with quantitative easing.

The size and duration of measures in that announcement could move markets, if the BoJ does something unexpected.

The U.S. 10-year bond yield moved uncertainly through a familiar yet changed landscape. Yields were down in mid/late-afternoon trading, but we look for the rest of this week to give a more complete tale.

Equities can also be put in the same boat, although their situation is slightly different because of the recent run-up in prices, which has taken a hiatus for now.

So, the big questions are this for the remainder of this week and for the next: Will gold sustain its rally and find longer term strength? Will equities fall back, consolidate and go sideways into August, a notoriously slow and therefore volatile trading month?

Wishing you as always, good trading,