Looking Beyond The FOMC Press Release For Gold And Equities

Gold is holding a very fine gain despite the fact that the U.S. dollar has recovered some its losses. We need to be wary of what lies over the horizon, however, and we do mean the immediate horizon.

Markets are by nature reactionary. So, if today gold bulls are bidding up the yellow precious metal we can count on profit taking, if not tomorrow, then shortly thereafter.

We’re placing our bets on tomorrow given the summertime schedules of many traders and investors who like to scoot out of New York to their vacation places as early as possible on Fridays. And what could be better than a tidy $20-plus gain going into the weekend? No muss, no fuss. Sit back and drink a few gin and tonics and don’t watch the market until Monday at noon.

We also are confronting more contortionism from Greece, which will only end badly for them. However, Greek irrationality is good for gold bulls since it stimulates haven buying. On the other hand, it’s bad for gold bulls because it depresses the euro, boosts the U.S. dollar, and that pushes down gold prices courtesy of the currency swing. The European Central Bank is warning that it is possible that Greek banks will not open on Monday. It’s sad to see a country commit financial suicide.

We’ll focus on fundamentals here and now, and leave it to the technical portion of the newsletter to discuss gold’s range in depth. But, since gold has operated in a certain range for so long, it can almost be considered as a fundamental at the moment.

All three American stock exchanges are up over 1% after the FOMC information was released. Equities love stability and abhor volatility. That does not bode well for gold prices because sooner, rather than later, money will flow into equities for better or worse. This will be especially true if gold remains volatile within its current range.

What about inflation and the Fed? The Labor Department said on Thursday its Consumer Price Index rose 0.4 percent in May after gaining a mere 0.1 percent in April. That was the largest increase since February 2013, and left the CPI unchanged in the 12 months through May after a 0.2 percent yearly decline in April. Taking the long view, it certainly doesn’t seem as if inflation is anywhere near the 2% Fed target.

What’s happened to price pressure? There are a few theories, no single one being wholly satisfactory.

The first is that food prices remain very stable in spite of temporary concerns about egg production. Food production in the U.S. consistently gets more and more efficient. The only real trouble spot may be California because of the drought.

The second theory entails households of workers who are just now returning to the work force and newly minted grads who are saddled with education debt entering the workforce. It should come as no surprise that those two groups would be funneling their new earnings not toward consumer products but toward heaving debt burdens off their shoulders.

The third theory is that in general the economy is operating more efficiently. Foreign goods are cheaper because of a stronger dollar and U.S. manufacturing is in the midst of a golden age of productivity what with robotics and on-time scheduling of materials and the resultant finished products. Quality of products is rising, necessitating fewer purchases.

The fourth and probably most potent theory is demographics driven. The two largest cohorts in the country are simply buying less, for two very disparate reasons. Everyone knows the population is graying. That means fewer units of everything except food and drink, health care services and medicines, and travel. How many washing machines, for instance, will the 60-plus cadre buy this year? Comparatively few. On the other hand, Millennials do not have the money to buy big durable goods items. And, if new home construction, which requires a panoply of materials and products, continues flat because Millennials are not buying, there you have another market softener.

Additionally, the major cause of the uptick in inflation in May is higher energy prices, especially gasoline. The price won’t go up indefinitely. In fact, in our eyes, it’s more likely to come back down.

Where will the Fed find the inflation they’re looking for? Nowhere.

And how will they rationalize a rate increase – any increase and even a low and slow trajectory for increases?

Our only answer is this: ideology. There is a group of people who will start saying, “Rates have been low for too long. They ought to go up because they ought to go up.”

They’ll be wrong, naturally, but their notions of what constitutes the reason for a rate hike will eventually prevail. It will be another blow against pragmatism, realism and mess up a good deal for the American public.

Wishing you as always, good trading,