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LAWRIE WILLIAMS: Gold holding up well as day of reckoning approaches

Given a seemingly favourable economic wind, analysts and commentators now see around a 90% likelihood that the US Federal Reserve will, this week, signify a 25 basis point rise in interest rates up from around a likelihood of only 30% a couple of weeks ago despite no real details yet available on President Trump’s likely economic stimuli.  The big change in sentiment, which occurred over a couple of days of Fed grandee bullish statements, knocked the gold price down well below the $1,200 psychological level and silver comfortably below $17 from respective prices of close to $1,250 and over $18.  They have both recovered somewhat (silver less so perhaps) from their recent low points. 

As I write, gold is at $1,205 and silver $16.96 – both showing good increases year to date (gold up from $1,151 and silver up from around $15.90)  but far below the kinds of prices precious metals bulls had been anticipating.  The precious metals bears have been in command ever since the almost unprecedented, and concerted, talking up of the likelihood of a Fed interest rate increase, which has boosted the dollar index (although this has come back a little after being talked down by the US Administration) and caused the sharp falls in precious metals prices.

So what will happen now?  One would think the precious metals prices are already discounting a Fed interest rate raising decision announcement at the end of the FOMC meeting on Thursday, but that won’t necessarily prevent a bear raid as the decision is announced, assuming there will indeed be an interest rate rise.  What will generate most attention though is whether Fed Chair Janet Yellen, in her ensuing statement, will suggest a more aggressive programme of interest rate rises during the remainder of the year. 

Yellen has already intimated that the Fed is looking towards three interest rate rises in 2017 – possibly four – and if she tends towards the latter in particular we could see further carnage in the precious metals markets, although this could be shortlived - particularly if an announced aggressive interest rate rising intention starts to prompt a serious downturn in general equity markets.  If this happens, and there is precedent for aggressive Fed interest rate raising hitting equity markets hard, then the Fed might be dissuaded from continuing a rising rates programme, which would probably see a major turnaround in the dollar index (downwards) and precious metals (upwards).  Interestingly this is roughly the Jim Rickards scenario from some time back when he was one of the few analysts/commentators then predicting a Fed rate rise in March.

Other pointers to precious metals performance are a little mixed at the moment.  There was some (presumably) institutional disinvestment from the world’s largest gold ETF – SPDR Gold Shares (GLD) – last week and on Monday, but these didn’t do much to move the gold price.  Nor did a big inflow yesterday of nearly 7 tonnes seem to have much effect either.  But overall GLD has added around 18 tonnes of gold year to date.

Interestingly the gold price is up around 4.7% and silver 6.7%.  This compares reasonably favourably with the heavily hyped rise in the DJIA (also up 4.7%) and S&P 500 (up 4.5% ytd).  If one reads media headlines it would be hard to come to this realisation, although gold and silver are certainly, so far, more volatile.

Of course if the Fed doesn’t raise interest rates at the forthcoming FOMC meeting, precious metals could go through the roof but we now see this as unlikely.  If an aggressive Fed decides to raise rate by 50 basis points (again probably unlikely as the cautious Yellen will probably want to test the water first, the gold and silver could take another nasty knock.  If the consensus happens and rates are raised by 25 basis points it SHOULD have little effect on precious metals prices which have already anticipated such a rise, but on past Fed rate raising decisions, even though they may have been expected, the actuality could see a raid in the futures markets to drive the price downwards, although we would expect such a move to be quickly reversed given interest rate will effectively still remain in negative territory.  But, as we have intimated above, it is the tone of Janet Yellen’s post FOMC meeting statement which could have the biggest impact.  We’ll have to wait and see.

14 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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