Fed Speak and Intent Weigh Heavily on Gold Pricing

June 15, 2017 - 5:27pm

 by Gary Wagner

There’s a new Sheriff in town, spreading hawkish sentiment wherever she goes. Chairwoman Janet Yellen is not actually a new Sheriff, but statements she made at yesterday’s news conference, coupled with the press release issued by the Federal Reserve, reveal a much more aggressive stance by the Fed.

The highly anticipated rate hike announced yesterday was already largely factored into the market. This marks the second rate hike this year and the third time that the Fed has raised interest rates since it began the quantitative easing program initiated in 2008. Additionally, the Federal Reserve’s revealed its intention to implement an additional rate hike this year.

However, the wildcard of yesterday statements were comments made in regards to plans to liquidate part of their balance sheet of assets, which now totals 4 ½ trillion dollars. This asset liquidation is commonly referred to as a stealth hike in that it has the same net effect of an interest rate hike. Simply put, massive liquidation will change the basic supply and demand variables intrinsic to pricing. A massive increase in supply with demand remaining steady will have a dramatic impact on pricing.

As reported in an addendum to yesterday’s press release, the Fed stated, “The Committee intends to gradually reduce the Federal Reserve's securities holdings by decreasing its reinvestment of the principal payments it receives from securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps.”

Furthermore, the asset liquidation will begin as soon as this year, and once initiated become a regular monthly occurrence. “For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.”

Occurring concurrently, the Fed will also liquidate mortgage-backed securities. “For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.”

This is the first time the Federal Reserve has revealed its timetable and the extent of asset liquidation. Simple math shows that they plan to cap the liquidation of assets to $50 billion monthly once the program is in full swing.

The net effect of this technique is uncertain. What is certain is that the asset liquidation of $50 billion monthly could have a profound impact on the financial markets as a whole.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

Gold Forecast: Proper Action
We are currently flat, with no active trades.  We are waiting for our next signal to enter a trade. It was my belief that our best play today was a neutral stance. Now that the FOMC meeting has concluded we can digest the implications of a slealth Hike. Our current target for gold is 1245
 
We were long gold from 1264. Last Tuesday we sent out a TRADE ALERT to move Stop below 1280* 
Leg 1  Long June gold at 1225.00  Out at 1260 for a profit of $35.00 or $3500 per contract
Leg 2  Long August gold at 1264.00  Out at 1278 for a profit of $14.00 or $1400 per contract
Total Profit on trade is $4900 per contract
Gold Market Forecast

Yesterday's FOMC meeting revealed the extent and pace of a series of balance sheet liquidations which could be initiated by the Fed as early as this year. This program will ramp up over time and Once the monthly asset liquidation reaches $50 billion. This technique commonly referred to as a stealth hike could have a profound impact on real interest rates, in which rates rise at a much quicker than anticipated pace. This information has given the dollar index a strong tailwind to propel it to higher pricing, and as such puts strong underlying pressure on the precious metals complex.