Gold Still Eyeing Fed Rates

On fears regarding a Fed rate increase gold tumbled in regular trading, a move down that was moderated by a substantially weaker U.S. dollar today.

The dollar was off about 1.00% against the euro. Equities were up but mixed, spotty first earnings reports pushing some stocks up and some down. Crude was up on continued worries about U.S. supplies and stockpiles.

Perhaps driving concerns in the gold market most was a report today that showed retail sales jumped by 0.9% in March. This was read as an indicator that the bumpy first quarter was an anomaly and the U.S. economy might well be in the process of returning to more robust growth.

The implications for gold stem from the notion that the Federal Reserve will be more willing to raise rates earlier – possibly even in June – should the stronger growth continue in April and May.

"A rebound in retail sales in March provides evidence that the U.S. economy is pulling out of a soft patch seen at the start of the year. The improvement in retail sales adds to the likelihood of policymakers voting to hike rates this year," said Chris Williamson, chief economist at Markit in London.

Although we’re generally leery of breaking economic data apart, retail sales excluding automobiles, gasoline, building materials and food services rose 0.3% after dropping 0.2% in February. The “core retail sales” number corresponds most closely with the consumer spending component of gross domestic product.

So, the 0.3% rise, if it continues for a year, would represent a 3.6% increase when amortized over the next 12 months. That is quite robust given that the American economy biggest sector is retail, which accounts for 70% of the overall picture.

A bit of a mixed picture emerged from producer price inflation, however. In the 12 months through March 2105, producer prices fell 0.8%, the biggest year-over-year decline since

Energy prices have stabilized although still low; a strong dollar and weak overseas demand for U.S. products are likely to keep inflation subdued for quite some time.

There is not enough inflation to warrant diving into gold as a long-term bullish proposition. That would take some molten-hot inflation data.

If the Fed goal is approximately 2% inflation and 5% unemployment, it seems to us we are still a long ways away. Although one does have to take into account the “aircraft carrier effect,” meaning that stopping a huge vessel in the water moving at an even moderately rapid speed takes some time.

FOMC members are no doubt formulating that calculus in private discussions.

Wishing you as always, good trading,