The Phantom Of Interest-Rate Ideology Challenges Gold

We live in a world of Goldilocks data reports. Not too hot, not too cold, not quite “just right.” From our point of view, the economy is still lagging. (The key reason is lack of wage growth, which is breeding fear and resentment among American breadwinners.) This is a week during which we will be seeing many, many reports released that will give us a fairly firm idea of how the U.S. second quarter will shape up.

We live in a world of mixed data reports: Industrial output revived somewhat in the U.S., but consumer spending was flat in April due to a higher savings rate.

Let’s leave the U.S. aside for a moment. Europe is fair-to-middling. China is showing signs of fatigue and perhaps is in a bubble. Japan has come back as surprisingly strong.

So, when we hear Fed officials, many of who are not voting members this year on the Federal Open Market Committee, call for “immediate rate hikes,” we wonder if they live in the same universe as the rest of us. Boston president Eric Rosengren and Fed vice chairman Stanley Fischer have said as much, although they walk back their comments as quickly as they utter them. Interestingly, Fischer let slip a scary notion – that we may be slipping into “secular stagnation.”

However, other Fed presidents do not walk back their firm commitments to raising rates as soon as possible. This leads you to believe that they are not pragmatists but rather ideologically driven thinkers who believe “it must be this way,” because it “has to be this way.” Yes, most ideological thinking is rather circular, but that’s the way it is.

What this does to gold is a) keep it range bound and b) continue to paint the yellow precious metal as a less-than-worthy investment. Gold investors and traders can’t be certain when rates will be raised and under what circumstances. (Although we do believe that the steadier members of the FOMC have no intention of raising rates until September or even December.

U.S. equities were up today in the 0.30% range, neither stellar nor deadening. The U.S. dollar is up a half percent and more against major currencies, including the euro.

Dollar strength has deflated gold, then, once again.

Crude was also driven down by dollar robustness, and so precious metals and oil continue to stay yoked to one another. Bond yields are also struggling in a range, although their reaction to Federal Reserve weather seems to be much more measured than does that of gold or crude.

A brief update on Stanley Fischer’s Monday comments: he stated flatly that we are not yet out the financial crisis we entered in 2008 and had brewing two years earlier. That is sobering news. It could mean low rates will be with us for some time yet to come. That would be good for gold. We need direction.

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Wishing you as always, good trading,