Gold Reacts Positively Despite Improved Fed Outlook

July 27, 2016 - 5:14pm

 by Gary Wagner

The opening paragraph of the FOMC’s press release says it all. Our italics indicate the highlights:

“Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May.

“On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months.

Household spending has been growing strongly but business fixed investment has been soft.

Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.

Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.”

Yet, there is a more positive overall tone to the release, expressing almost a sense of relief.

But there is also a lingering overtone of worry. Joseph LaVorgna, chief U.S. economist at Deutsche Bank, said, "However, the Fed has gotten wise to the fragility of markets. They kept in that they're still monitoring financial conditions, so even though many things broke positively for the Fed since their last meeting, they want to be extra cautious."

After some back and forth, gold traders ultimately (for the day, anyway) interpreted the short after-meeting news release as dovish, meaning that rates were staying put for a while longer. Gold at 3:30 in New York was up 1.30%.

Silver, platinum and palladium all roared. Silver is up 3.50%, platinum by almost 4.00% and palladium 2.30%. Ride it like you stole it.

The boiler-plate wisdom runs like this: gold is very sensitive to rising Fed rates, which lift the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced. Leaving rates alone has an opposite effect.

However, we can be certain that in the next three meetings, rates will be raised once, and if inflation ticks up, perhaps twice. It’s possible we will get one rise, but in the 0.50% to 0.75% range.

The Fed is not the only central bank on stage this week. Friday, the Bank of Japan will issue its statement(s) regarding the way forward with quantitative easing.

The size and duration of measures in that announcement could move markets, if the BoJ does something unexpected.

The U.S. 10-year bond yield moved uncertainly through a familiar yet changed landscape. Yields were down in mid/late-afternoon trading, but we look for the rest of this week to give a more complete tale.

Equities can also be put in the same boat, although their situation is slightly different because of the recent run-up in prices, which has taken a hiatus for now.

So, the big questions are this for the remainder of this week and for the next: Will gold sustain its rally and find longer term strength? Will equities fall back, consolidate and go sideways into August, a notoriously slow and therefore volatile trading month?

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

Gold Forecast: Proper Action

This morning, just following the conclusion of the FOMC meeting, we issued a buy signal in gold. Traders taking that call initiated longs at 1332.

Maintain current long at 1332

Maintain current stop below 1305.

 

Gold Market Forecast

Over the last week of trading we had noted the fact that although gold prices were not moving substantially to the upside, a base or bottom was forming right around 1315 per ounce.

On yesterday's report we spoke about the fact that it now seemed likely that a bottom was in place but we still required technical evidence that a key pivot point or "V" was evident in the market. The criteria that would confirm that assumption would be gold prices breaking above 1330.

Following this month's FOMC meeting's conclusion, in which the Fed stated that interest rates would remain the same, we saw gold drift slightly lower for a few minutes, and then begin to move into rally mode. As soon as we saw the market price of gold break above 1330 it was evident that we had now seen gold prices meet the criteria for a key reversal and we initiated our long position.

On today's video report we will detail the thought process behind this most recent trade as well as the logic behind our current stop. More importantly we will also define our upside target or exit strategy should the market continue to move in an upward direction.

Trending Markets Forecast

We saw a very interesting reaction to today's announcement by the Federal Feserve that interest rates would remain steady.

US equities, specifically the Dow Jones industrial average, had been trading slightly lower for the better part of the morning. Once Fed minutes were released we saw moderate and tepid moves to the upside that could not be sustained. The Dow Jones industrial average in essence closed unchanged, the Standard & Poor's 500 moved slightly lower and the NASDAQ higher on the day.

Crude oil has effectively hit our initial target that we have been looking for of $42 per barrel. On today's video report we will detail our current model and interim forecast in crude oil.