Waiting for Gold To Get In Step With Other Markets

Fundamentally speaking,, gold should have been bid up strongly today. Instead, it found its momentum almost wholly from a weaker dollar. Generally, when Fed interest rates seem likely to hold steady or drop, non-interest-bearing instruments like precious metals should rise in value.

Federal Reserve Governor Lael Brainard said in Chicago today “The case to tighten policy preemptively is less compelling.” She cited a number of items on the Fed list but we found the most interesting one here in this quotation: “Asymmetry in risk management in today’s new normal counsel’s prudence in the removal of policy accommodation. I believe this approach has served us well in recent months.”

She explained that it is easier to react to a spurt of growth in key Fed indicators than it is to right the ship if those indicators unexpectedly turn negative.

Governor Brainard highlighted five major reasons for caution: 1) inflation is less responsive to labor-market improvement than in the past, 2) labor-market slack seems to persist, 3) financial transmission from foreign markets is strong and poses a risk, 4) the interest rate where policy moves from easy to tight is lower than in the - and is likely to stay there for some time past and 5) monetary policy is less able to respond to negative shocks than to a quick pickup in demand. (As we said above.)

In the simplest of terms, financial transmission from foreign markets encompasses the whole range of interplays between the many central banks and their policies, real interest rates, currency strengths, and stock markets.

While gold wasn’t certain about its stance after Brainard’s remarks, equities bounced back after Friday’s worry-fest that was stoked by fears Lael Brainard had turned suddenly hawkish. She didn’t and now Friday’s Henny-Pennys look silly.

The three major indices in New York were up over 1.00%, with the NASDAQ playing lead dog, rising 1.45%. Europe was the mirror opposite, down across the board well over 1.00%. Asia fared even worse. Their three major indices were down approaching 2.00% (Nikkei and Shanghai) while Hong Kong was down 3.35%. We note that the Shanghai index is hovering right around 3,000, a level at which it has found stagnation-driven equilibrium. That is the fear of weak foreign economies in a nutshell.

Based on the remarks from Lael Brainard, U.S. 10-year and 30-year bond yields were down after having reached for 1.70% and failed. We expect them to come down more this week.

Oil, which had been trading in negative territory for much of the regular session managed to pull out gains of 0.90% (West Texas Intermediate) and 0.67% (Brent North Sea). Oil is in a long-term price trap. Some OPEC reports are already confirming that the energy surplus will last well into 2017.

Wishing you as always, good trading,