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LAWRIE WILLIAMS: Gold back at $1270 level after cautious Fed statement

Well the latest Fed deliberations appear to have favoured the so-called ‘doves’ with the consensus predictions coming about with the predicted number of any further interest rate rises this year (if indeed there are any at all) being halved to two.  This suggests year end Fed interest rates of between 0.75 and 1 percent – and no immediate rate rise triggered.  The whole scenario will play out again in around 6 weeks' time.  Will it be any different then?

The immediate beneficiary of the Fed non-decision was a boost to general equities, both in the U.S. and globally (apart from Japan’s Nikkei which slipped a little).  This should be a little worrying for the Fed in terms of possible future rate hikes.  Does this mean that equities will fall should the Fed increase rates later in the year?  Equities markets are fragile at the moment amidst talk of a potential global recession.  The last thing the Fed would want to do would be to take any measure that might precipitate a Wall Street crash.

An even bigger beneficiary was the gold price which gained $40 or so and surged back to trade up to around $1,270 –  consolidating gold bulls will hope – in the $1,260s, although has subsequently drifted back to the $1,250s.  However it should be said that gold only fell back to the $1,230s over the past week engendered by nervousness ahead of the Fed’s statement.  One doubts that the Fed takes the likely movement of the gold price into consideration when deciding whether or not to raise interest rates – but it will certainly take the likely path of U.S. equities markets into account.  Sentiment is everything in maintaining any confidence in the progress of the U.S. economy and a crash in equities would be hugely counter-productive.  Gold, on the other hand, may be seen as a bellwether for the U.S. dollar and the economy among some savvy investors, but in terms of the general public it remains something of an irrelevance.  It accounts for too small a percentage of investment assets to be seen as having any real significance, except by those who understand its true role – and they are few and far between.

So how about the U.S. dollar (which also has an important impact on gold and dollar traded commodity prices)?  Well it fell back with the Index level down at around 95 – down from over 100 back in December when the general consensus was that raising interest rates would lead to further dollar strength.  This did not come about, and not raising them further appears to have led to a fairly significant fall.  This may not worry the Fed too much – U.S. exporters had been suffering as the higher dollar had been making their products uncompetitive.

However, this will be a blow to other competing currencies like the Euro, the Swiss Franc, the Japanese yen and the Chinese yuan and may lead to moves by their central banks to try and devalue their currencies against the dollar, even if only by fairly small amounts.  All these are the kinds of consequences the Fed will be having to take into account in its deliberations.

So where next for the Fed?   Inflation remains below its target.  The Fed’s inflation figures may well not tally with those of other observers, but they are the figures it bases its decisions on!  Unemployment in Fed terms is on track, although again independent assessors of the true unemployment situation feel the official figures are way, way too low.  But again the Fed figures are those on which it will base its future decisions.  There’s a strong chance that at the next Fed Open Market Committee meeting, scheduled for late April, nothing much will have changed, but then it may find itself under stronger pressure to confirm a forthcoming rate rise, if only to try and maintains credibility in its prior forecasts.  We don’t yet see it doing an about turn and cutting, or implementing a new QE phase, although some forecasters have predicted this.  Such a decision would be a bitter blow to the Fed’s forecasting credibility, which is fragile enough anyway.  So kicking the can further down the road would seem to be the most likely scenario failing a big upturn in the U.S. and global economies – for which there is little in the way of evidence to support this in the short term at least.

So where does this all leave gold – and silver?  Poised we would reckon.  Gold had moved back to the $1,270 level as I write and silver is picking up nicely pari passu with gold.  If momentum continues then we see no reason why gold couldn’t move ahead towards the $1,300 level and silver to say $16.25 or higher.  But gold is always tough to forecast.  When you expect it to rise, something brings it back down to earth – usually strange dealings on the futures exchanges.  We can probably expect to see something like this taking place in an attempt to curb, or at least control, any upwards movement.  But as trading continues moving eastwards towards China with the opening of the Shanghai Gold Exchange’s new benchmarking system next month, the abilities of the U.S. futures markets to control the global gold price will become more and more limited.  But will a Chinese-influenced system be any more supportive of gold while that nation continues to build its gold reserves?  We will have to wait and see.

17 Mar 2016 | Categories: Gold, Dollar

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