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LAWRIE WILLIAMS: Gold and silver holed by the Fed – again

Just when precious metals bulls were beginning to think that gold and silver prices were headed onwards and upwards, US Fed officials, in concert it seems, came out with statements to dampen their enthusiasm.  It was a case of déjà vu all over again.  The threat of an imminent Fed rate rise took the wind out of the gold and silver sails and knocked the former back well below $1,230 – when it had seemed to be headed towards $1,260 and up while silver is now back well below the $18 it had previously seemed to have breached comfortably.

The consensus among analysts had been that the Fed would not start raising rates until June, but following the various statements from Fed heavy hitters like John Williams of the San Francisco Fed, William Dudley of the New York Fed, Robert Kaplan of the Dallas Fed and Fed Governors Jerome Powell and Lael Brainard all seemed to be pointing to an early rate increase.  The icing on the cake will probably come today at 1pm ET when Fed Chair, Janet Yellen is due to speak in Chicago.  The odds of a March interest rate increase are now put at over 80% - up from around 20% only a week ago!

Almost alone among high profile gold and geopolitics commentators, Jim Rickards had long been predicting an early rate increase in March, despite no flesh yet being available on President Trump’s tax cutting and stimulatory agenda.  However it should be noted that Rickards was also suggesting any rate increase would be shortlived, saying "They will raise (rates) in March and then something will hit the wall, either the economy or the stock market or both. Then the Fed will backpedal from there, starting with a forward guidance then perhaps a rate cut later in the year." 

One would think that the plethora of key Fed individuals’ statements suggesting an early rate increase, would now seem to make the likelihood of the mover to raise interest rates by another 25 basis points at the march FOMC meeting (on the 14th and 15th) an almost certainty.  The Fed will lose whatever credibility it still has after prevaricating on rate increases for so long in the preceding years, if it does not move then.  But is Rickards right in that such an increase is not warranted by the economic conditions? 

To an extent any interest rate rise puts the Fed on a collision course with President Trump’s stated opinion that the dollar parity is too high given that any Fed rate  tends topush the dollar iundex upwards.  Indeed the likelihood of a March Fed increase has already seen the dollar strengthenagain after it had been seen to be falling.  This morning the dollar index is above 102 after falling close to 100 only a week ago – so some, but not nearly all, of the recent decline in the gold price can be attributed to the rising dollar. 

From the contrary view to that of Rickards though a March rate rise could make the Fed's target of three rate rises during the year more likely - indeed raises the possibility of four rises.  We shall have to wait and see how the year progresses.

What is less certain however is what effect the rising dollar and interest rate hikes will have on the still buoyant general equities markets.   Both the Dow and the S&P fell sharply yesterday as the markets mulled the latest rate increase odds, and Asian and European markets are down this morning.  Given there is still optimism about President Trump’s forthcoming economy-stimulating measures this may well just be a temporary blip, but if it turns into the much predicted collapse in the equities markets, Rickards could well be correct and the Fed may have to backtrack sooner rather than later.

There’s still much uncertainty out there which could yet affect precious metals prices positively.  The UK is due to trigger Article 50 and make the timetable for leaving the EU that much more definite, while the very controversial French Presidential election is due to start towards the end of April.  President Trump’s agenda is still beset with uncertainty, as is his apparent unpredictability despite his rather more circumspect address to Congress this week which suggests he may be mellowing in office.

This is not to mention potential ‘black swan’ events – the ‘unknown unknowns’ that lie ahead and some perhaps more predictable at least rhetorical clashes between the US and China and North Korea and possible additional problems in the Middle East and Eastern Europe.  We are only just over two months into what could be a very difficult year economically and geopolitically so don’t write precious metals off yet.

03 Mar 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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