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LAWRIE WILLIAMS: Fed blows hot and cold, gold and commodities seesaw

If I were a cynic, heaven forbid, or a conspiracy theorist, I might be drawn to the conclusion that there is some kind of method in the individual Fed’s Open Market Committee’s members' madness in alternately making statements that are interpreted as first ‘hawkish’ and then ‘dovish’ with corresponding dramatic effects on equities, the dollar, gold and commodities – with precious metals perhaps the most affected.  Could it be, the cynic might wonder, are the FOMC members playing the markets by issuing individual statements that they must be aware will drive all these markets one way or another, in some cases by, in economic terms, percentages on which the traders of this world can make very significant gains if they are aware of which way these statements may drive these markets.

Take these latest shenanigans affecting the markets.  First there were a number of statements out of individual Fed leaders towards the end of last week taken as suggesting the next Fed interest rate rise could be implemented sooner rather than later (the hawks).  The dollar rose, equities dropped sharply as did commodities in general, with precious metals particularly heavily afflicted.  Spot gold, for example, fell back nearly 4% at one time and silver by even more at over 5%.  A trader’s dream if on the right side of the call.

And then yesterday Fed Chair, Janet Yellen, gave a speech to The Economic Club of New York, interpreted as suggesting an early Fed rate rise is not on the cards, and equities, precious metals and commodities all bounced back.  Spot gold had picked up 2.6% at the time of writing to back over the $1,240 level from a nadir of around $1,210 and silver up 2% from a low of around $15.08 to over $15.40.

Now all these rises and falls are on nuances in the various presentations.  Fedspeak is anything but transparent.  However those making the statements must be aware of the likely effects of what they say on the markets.  Surely they are not so naive that they think their statements will be seen as neutral?

But, are the markets even drawing the correct conclusions – particularly in the case of gold and silver?  Consider the widely predicted Fed rate rise initiation back in December.  The Fed raised rates by the expected small amount and once the Christmas holidays were over, contrary to the widely perceived effect as predicted by virtually all the mainstream gold analysts, precious metals began to rise – gold up around 14% in the 3 months since, while equities stuttered.   What is to say another 25 basis point rate increase will this time drive precious metals downwards, or would they, after an initial hiatus, rise again?

Is there some kind of hidden agenda here?  We somehow doubt that gold and the other precious metals are given much, if any, consideration in FOMC deliberations.  But general equities most certainly will be.  The Fed won’t want to be seen to be driving equities markets downwards – upwards maybe.  After all the FOMC is made up of members of the financial elite which benefits most from equity market rises.  Or am I being too cynical here?

Perhaps there should be a moratorium on public pronouncements from prominent FOMC members between FOMC meetings given the effects such deliveries have on the markets.  Complete freedom of speech is all very well, but with such freedoms there are also responsibilities.  This commentator firmly believes that the kinds of conflicting statements from Fed members, which may differ from the consensus of the actual FOMC meeting, should be held in check under collective responsibility. They should either toe the FOMC line, or keep quiet.  Their individual views, because of their position within the central bank hierarchy, are too sensitive for the markets not to be swayed one way or another by them and the volatilities so exposed are too prone to be interpreted as buy or sell signals by the markets and thus open to accusations of intentional market manipulation.

30 Mar 2016 | Categories: Gold

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