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LAWRIE WILLIAMS: Gold hit by Fed statement – but will recover!

One step forward, two steps back.  That was the gold price performance yesterday during U.S. Fecd Chair Jerome Powell’s press statement.  Initially the gold price kicked upwards, but then came back to earth, and below, despite no real change in Fed policy.  Indeed with U.S. President Trump commenting that the Fed should reduce interest rates one might have thought the opposite would be the case, but Powell is presumably keen to at least maintain the pretence of independence from Presidential interference and seems to be following his own path.

In effect his statement tended to paint a rosy picture for the path of the U.S. economy looking forward, despite some worrying data which might suggest the opposite.  The statement certainly didn’t help the markets with the Dow down around 160 points on the day, while the U.S. dollar index recovered to the positive after an earlier fall, neither of which may please the U.S. President who has made no secret that he would like the dollar to fall back a little to make U.S. exports more competitive on world markets.

What really seems to have spooked the gold price was Powell’s and the Fed’s overall optimistic tone and then the position on the IOER (Interest Rate on Excess Reserves) which was reduced from 2.4%  to  2.35%.  This is another tool in the Fed’s armoury for keeping the economy under control.  The reduction signified that the Fed is less worried about the future path of the economy.  Powell’s statement also noted that the Fed was not worried about the low inflation levels seeing these as only temporary, although some economists disagree!  However, given that there are many who believe that the government’s calculated inflation levels are a fiction and that true inflation rates as they affect the person in the street are far higher, we might tend towards the Powell view.

Powell commented that the IOER move as being a “small technical adjustment” which does not signify any move in the Fed’s overall positional stance.

On the overall economy he commented that “solid underlying fundamentals” including job growth, rising wages, strong consumer sentiment, and business investment were all supportive of an expanding U.S. economy, but he put the weak inflatioin rate down to “transitory factors.  He then went on to suggest that the Fed expected inflation to return to 2% over time.

On what might have been the positive side for gold the Fed’s position on interest rates remained unchanged and they were held at the 2.25-2.5% level, but this was very much as expected.

Given that there was effectively no change in the Fed’s overall position, and virtually all the factors Powell had noted on the assumed strength of the U.S. economy had been well  triggered in advance we feel that the sharp move downwards in the gold price was largely unjustified and prices should thus recover much, if not all, the lost ground. 

Much of the fall will have been due to the perhaps over-optimistic tone of the Powell statement on the U.S. economy which we feel does not represent accurately the underlying position being dependent very much on current government statistical data which tends to present trends in a more positive light than the old data would have done.  Every time any government changes the formulation of its data presentations the result seems to end in a more positive outlook than the old data would have shown.  One only has to look at John Williams’ (no relation) shadowstats data to see how U.S. government data has been massaged over the years.

As an example here is a note on latest U.S. data from the shadowstats websitebased on latest data outputs.  Is the U.S. economy in as good a shape as Powell’s latest statement might suggest?  Judge for yourself: Nominal 1q2019 Construction Spending Declined Year-to-Year for First Time Since the Onset of the Great Recession / Three Consecutive Real Quarterly Contractions Now Are in Place / Heavy Downside Revisions and Negative March Construction Spending Imply Some Downside Revision to 1q2019 GDP / March 2019 Real U.S. Median Household Income Declined for the Second Month / Mounting Consumer Liquidity Stresses Negatively Impact Economic Activity / GDP Conundrum: The Consumer Controls 72% of the GDP, but Generated Only 22% of 1q2019 GDP Growth, Amidst Mounting Financial Stress / Unfolding Recession Remains In Play / “Advance” 1q2019 Real Annualized GDP Growth Was a Not-Credible 3.17%, Versus 2.17% in 4q2018, With Headline Strength Built Upon Incomplete and Shutdown-Impaired Data / Consider: Collapsing Goods Consumption Implied by the “Improved” Trade Deficit Was Not Accounted For Fully.

So we would suggest that U.S. economic growth calculations are not realistic as presented by the Fed and other U.S. statistical bodies.  Coupled with flat global gold supply and increasing demand – notably from central banks – as pointed out in the World  Gold Council’s latest Gold Demand Trends publication (which we will be reviewing some aspects of in a forthcoming article), we suspect gold (and silver) prices may be due for an uptick in the short term once the markets digest the latest information.

02 May 2019 | Categories: Gold

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