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LAWRIE WILLIAMS: Fed rose tinted view knocks gold back a few notches

Another Fed rate increase plus yet another knock-back in the gold price, yet this time the price decline was perhaps not as severe as on other occasions.  The June 25 basis point increase was widely expected – reports suggested a 90-100% consensus that the Fed would, indeed, raise rates.  However even a strong expectation of a Fed rate increase has, in the past, when it has become an eventuality, led to a far stronger downturn than that we saw on Wednesday when Fed Chair, Janet Yellen, released her statement.  However, to be fair the strength of the consensus opinion on this occasion surely meant that the rate increase had already been taken into account in gold’s pre-Fed performance.

Indeed, this time around it was probably not the rate increase itself which led to the price downturn, but the Fed’s rose-tinted view of the continuing advance of the U.S. econom.  This viewpoint was notwithstanding the fact that the Fed has been an exceptionally poor forecaster of U.S. GDP growth in the past and also appeared to have been completely unmoved by what must have been some disturbing economic data released just ahead of the FOMC meeting itself.

The markets appear to have taken Yellen’s statement at face value with the implication of at least one more rate increase this year and a beginning of a programme for the Fed to start reducing its balance sheet by the year end – assuming U.S. economic growth come up to Fed expectations.  But will it?  Recent data (poor job creation figures, lack of wage growth, disappointing CPI data, a continuing turndown in auto sales figures etc. etc.) suggests the economic growth figures the Fed is relying on ahead may not be forthcoming.

As far as gold itself is concerned recent import figures out of India and China suggest that the gold flows we have been seeing from West to East have been continuing unabated – indeed may even have been accelerating.  This can hardly be unexpected.  Citizens of the world’s two most populous nations, China and India, have a propensity to accumulate gold and wealth and the middle classes are expanding in both nations.  These two countries alone already account between them for the consumption of around 90% of global new mined gold and, as wealth advances, this is expected to rise.

There is a wide belief that certain elements within the central banking and financial sectors have been interfering with the price of physical gold, primarily to suppress it.  The gold price is seen as a bellwether for the state of the economy, and there has been considerable pressure applied by the political elite to maintain an aura of economic stability.  If this is indeed the case the ability to do so is being diminished the whole time without a substantial rise in the price of the yellow metal, as the amount of available physical gold may just not be forthcoming given that gold entering India and China does not tend to come out again. While any alleged manipulation of the gold price has been undertaken in the futures (paper) markets, as physical gold disappears from the market the credibility of paper gold’s ability to set the price has to be considerably diminished.

16 Jun 2017

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London – recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com

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