Gold flirts with $1800 as market participants digest yesterday’s FOMC meeting

As they say in real estate, it’s all about location. Yesterday judging by how gold and U.S. equities moved, it was not so much about the statement and dot plot, but it was all about Powell’s press conference. Gold had been trading lower before the release of the statement and dot plot trading to a low of $1753. Chart number one is a five-minute line chart detailing when Chairman Powell first took the podium. Gold had come off the prior lows but was still trading lower at $1762.

By the time Chairman Powell had concluded his press conference, gold was trading just shy of $1780. Since then, it has not looked back today, flirting with $1800 per ounce. The last time gold had a closing price this high was on November 5, two days after the November FOMC meeting. Powell’s press conference had a very similar initial effect during the November FOMC meeting compared to this month’s meeting. On the day following the last two FOMC meetings, gold reached a high of $1800 per ounce.

On the day the November FOMC meeting concluded gold futures had opened at $1790, traded to a low of $1758, and closed at $1763, resulting in a net decline of $27. Yesterday gold traded to a low of $1752, a high of $1781, and closed at $1763, netting a small decline. However, in both of the last two FOMC meetings the following day we saw gold prices spiked dramatically higher. On November 4 gold gained $24 on the day, and in today’s trading gold gained approximately $35.

Chart number two is a daily candlestick chart of gold futures with the conclusion of both November and December’s FOMC meeting highlighted. As of 4:27 PM EST gold futures basis, the most active February contract is currently fixed at $1799.60, after factoring in today’s net gain of $35.10 or 1.99%.

Interestingly the explanation for yesterday and today’s strong pivot in gold differs from analyst to analyst. It reminds me of the story of five blind men describing an elephant. In other words, each explanation for the most part is a partial explanation based upon the analyst’s vantage point.

My interpretation of why gold spiked higher while Chairman Powell was conducting his press conference involves a few factors but the most important one being that he differentiated the timeline for tapering and the necessary criteria needed to initiate the first-rate hike. By doing this market participants that were anticipating the first-rate hike immediately following the completion of the tapering process had to rebalance their outlook once it became clear that although the tapering process will end in March, the first-rate hike will not occur until the Federal Reserve’s mandate of full employment is met. Which Powell anticipated would occur about the middle of 2022. This statement truly tapered the more hawkish tone of the Federal Reserve with their monetary policy indicating three interest rate hikes in both 2022 and 2023.

If last month’s move in gold is any indication of what to expect following yesterday’s last Fed meeting of the year, it could be the beginning of a decent rally. The November rally concluded two weeks after gold reached an intraday high of $1879.

Wishing you as always good trading and good health,