LAWRIE WILLIAMS: Cautious Fed sees gold, silver and global equities rise, dollar fall
It’s a topsy-turvy investment world. The U.S. Federal Reserve raises interest rates by a small 25 basis points, the dollar falls, gold and silver prices soar and the global equities markets rise, although US equities have turned down this morning. Some put this down to massive short covering, but others to gold, and particularly silver, being previously oversold in any case in an uncertain world and to the Fed still appearing relatively cautious in its projections.
But we should have been forewarned. After a little over 8 tonnes of outflows from the world’s biggest gold ETF (GLD) over a 5-day period at the time the gold price was falling these had been replaced with inflows with 14.21 tonnes being added back in over the past four working days. The initial two days of rises had failed to move bullion prices at all. But this has proved to be a pretty accurate indicator of where the big money was actually going and it took the markets a couple of days to see this.
While the Fed has indeed started to ratchet up interest rates again, the language coming out of this week’s FOMC meeting has been relatively calm and cautious. Some had feared an aggressive tone with an indication that perhaps that there would be the likelihood of four interest rate hikes this year, but this was not forthcoming – at least not yet - with the Fed so far sticking to a gradual programme which will probably see interest rates effectively remaining in negative territory, as inflation rises, for the foreseeable future.
The lack of any signal that the Fed might be more aggressive and raise rates faster, also had an initially positive impact on the equities markets which had been strong anyway with a Trump bounce – some would say too strong with many warning of an imminent stock market collapse – but then most of these doomsayers have been saying that for the past few years. They will probably be proved right eventually, as will those predicting a $5,000 gold price at some unspecified time in the future. In investment advice, and decisions, timing can be everything! US equities look a little weaker today, but not yet significantly so given the Fed is still seeing as being circumspect in its rate rising scenario.
The fall in the dollar, which has obviously been a contributor to the rise in precious metals prices, seems to be something of an unintended consequence, albeit one which might see approval from the Trump Administration. Rising interest rates would normally signify a stronger greenback, particularly as virtually no major competitive economy has raised rates – except China which has a political motive in the face of Trump rhetoric, but a marginally stronger yuan has little impact on the dollar index. The Chinese may be looking to see the yuan fall long term, but in view of the Trump accusations that the Middle Kingdom is a currency manipulator damaging the dollar through a low exchange rate, discrete control to try and suggest the opposite, might be considered temporarily worthwhile.
Meanwhile, if you haven’t already read it, it is worth taking a look at my colleague (boss!) Ross Norman’s view on the situation – see: Rates Up - Gold Up - Why ??. In his article on the apparent anomalous reactions to the Fed rate increase he notes: “Essentially when the US Federal Reserve jawbones a potential move such as a rate hike (for the best part of a year), investor positioning is congruent with the expected outcome - that is to say dollar and equities up and, by extension, gold down. But what happens when they are too successful in leading the markets’ expectations and the market positioning is too extreme for the expected move. Well you have a heap of investors who are short gold and long the dollar/equities who don't get the win they expected... that is to say the move is over-priced into the news. As such, those investors - be they speculators in the futures markets or physical buyers who have forestalled their purchases for a hoped for price correction ... are vulnerable.” And how!
So where too from here? We would anticipate gold drifting higher and further inflows into GLD, although not at any great pace. Much of the precious metals price ground lost since the Fed ‘jawboning’ Ross Norman talks about in his article – but not all – has already been regained, although silver is still lagging for now. Platinum and palladium have both been significant beneficiaries – moving up sharply with the gold price – but despite both been seen as being in a supply deficit neither has yet taken off to the extent many analysts had been predicting although palladium, where the deficit is seen as most severe, did well last year and looks to have been the best performing precious metal so far this year too.