LAWRIE WILLIAMS: FOMC minutes have negative impact on almost all markets
Precious metals just don’t seem to know which way to turn. After immediate post-Christmas surges, the onset of 2022 has seen a big dip, a partial recovery and now another big dip – and we are only a week into the New Year. On performance so far, 2022 looks likely to be a hugely volatile year, not only for precious metals, but for all markets.
The latest announcement to have a significantly downbeat impact on most markets was the release of the Fed’s minutes on the deliberations at last month’s FOMC meeting. These were interpreted by analysts as suggesting a more ‘hawkish’ approach to the stated Fed position on likely interest rate rises this year. Observers and Fed-followers seem to be of the consensus that the latest discussions suggest that inflation, and its control, is becoming the Fed’s principal priority now that unemployment levels have been coming down nearer to the Fed’s 3.5% target level. This is taken as meaning a more aggressive approach will be taken bhy the Fed to the implementation of U.S. domestic interest rate rises in the current year in terms of more rises than originally anticipated, and possibly steeper ones too.
Although all the precious metals fell back on the release of the FOMC minutes - gold to back below $1,790 and silver to $22 – it was not just the metals that were affected ,with base metals mostly falling in price also, along with equities and bitcoin – with BTC dropping to below $43,000 - well over $20,000 below where it was only a few short months ago. The oil price though bucked the negative trend and roseto $80 a barrel.
The almost across-the-board falls could cause the Fed to think again on its possibly more aggressive interest-rate raising programme given its already-perceived likely negative impact on U.S. economic growth. Furthermore, the enormous surge in Covid infections being seen currently, and its likely economic effects, could also lead to a policy reversal. One of the reasons the Fed has, so far, kept interest rates ultra low, is for fear that raising them might torpedo any signs see so far of U.S. economic growth. If only the supposition that it will raise rates has such an adverse effect on the markets, the reality of so doing might well be seen as a step too far when it actually comes to decision-making time.
Meanwhile tomorrow’s job creation figures may also have a positive, or negative, influence on short-term precious metals prices. If they come in well below expectations of around 410,000 new jobs created in December, that could well see a recovery in precious metals prices. If however they come in at the forecast level, or higher, prices could take another knock. But it should also be borne in mind that December levels will mostly have been recorded before the highly infectious Omicron virus variant had fully impacted the figures.
Regarding the virus, Johns Hopkins University, which is running a continuing assessment of virus figures globally, reported a new record of over 1 million new infections reported in the U.S. on Monday. This is an absolutely massive number but probably also includes delayed cumulative statistics from States which don’t report figures over the preceding weekend. The worldometers.com data which reports actual daily state-by-state infection numbers came in at a little over 500,000 new infections on the same day, but this rose to over 700,000 new cases yesterday – so well on its way to the 1 million per day figure.
Growth in Europe demonstrates well the rising trend. Yesterday France reported over 330,000 new cases and the UK over 190,000. Italy and Spain also reported well over 100,000 new cases each, with overall global cases up around 78% week-on-week. The pandemic looks like remaining with us for some time yet and its progress in the U.S. could thus well impact the Fed’s interest rate decisions going forward.
Despite the negative impact on precious metals prices of the new FOMC minutes, we still feel positive on the gold price in the year ahead, and beyond, If the Fed does indeed take a more aggressive approach in its interest rate policy, this will only be because rising, or out-of-control, inflation is seen as an ongoing problem. But even so, the Fed is unlikely to raise rates fast enough to counter the impact of negative real rates, which tends to focus investor interest on what are seen as stable, and wealth protecting, assets like gold. Some of the inflation drivers may. Indeed, be transitory though and will likely dissipate as the virus pandemic is brought under control. But this will not happen in the short, or even medium, term as the Omicron, and possibly other new virus variants, will continue to have an impact on the economy for many months to come, if not for ever!