LAWRIE WILLIAMS: Gold continues to seesaw around Fed rate hike likelihood

First one US Fed leader says one thing regarding the possibility of a second interest rate hike this year and then another comes up with a different take on the U.S.’s overall economic position and gold and the dollar move up or down depending on what position is being taken.  We have commented before that why the gold price moves to the extent it does on the potential timing of what is likely to be a minimal interest rate increase of perhaps 25 basis points is somewhat of a mystery.  (See: Why does gold react so sharply to poss. Fed interest rate rise schedule?)  given that real inflation is growing at a higher rate than official figures suggest and effectively, even if there is a small rate increase, the U.S. will remain in negative rate territory, which is generally positive for gold, but this seems to be totally disregarded.

Regarding a possible Fed rate increase, possible dates, if the Fed will raise them this year, are September, November and December.  We can probably rule out November as the Fed meeting is scheduled only a week ahead of the US Presidential election and the Fed wouldn’t want to be seen as doing anything which might be seen as impacting the result for whatever reason.  That leaves next month – probably too early, given the tone of the last FOMC minutes – and a more likely date of December, a full year after the last rate increase assuming economic indicators don’t turn down, which they well could.  But from a Fed credibility point of view one suspects that there will be added pressure to go for a December rate rise and we would rate that as the most likely date even though a number of top rated analysts do not believe the Fed will return to making small rate rises until next year – if then.

So what if the Fed does raise rates by perhaps another 25 basis points in December.  The biggest worry for the FOMC is perhaps that this will adversely impact general stock market growth.    There are many out there predicting a stock market crash as stocks are seen as overvalued and the worry is that it may only take a tiny adverse change in interest rates to trigger the start of a major downturn. 

One doubts that the possible effects on gold will even be considered but it is worth remembering that after a very small adverse reaction given the rate rise was well forecast last December, within 3 weeks gold started on its upwards surge.  So much for adverse effects of a Fed rate increase on the gold price.

Personally one feels it would make sense to forbid Fed members from making statements suggesting whether or not rates will be raised sooner or later between FOMC meetings.  There’s always a knee jerk reaction in the U.S. markets following such statements with stocks, and gold in particular, moving up or down, sometimes quite sharply, on such statements which makes the potentially prone to abuse.  The Fed members who make these statements must be aware of exactly what their prognostications will do with respect to market movements.  Now maybe it’s Fed policy to promote such uncertainties, but if so it is a dangerous game to play.

19 Aug 2016

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).

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