LAWRIE WILLIAMS: Gold moving up ahead of FOMC meeting deliberations

Perhaps today is the next crunch day for gold with the US Fed's Federal Open Market Committee meeting which could yet recommend the commencement of an interest rate raising program this year.  Gold has moved upwards back above $1180 this morning on the general feeling that no decision is likely again on any definitive interest rate raising schedule, thus kicking this particular can ever further down the road.  But - this is still not a foregone conclusion with some official parameters being met which could indeed suggest an interest rates rise.  The language of any communique issued after the meeting will thus be examined closely and even the slightest interpretation that an interest rate rise may be imminent could yet bring the gold price crashing back down again late this afternoon.  On this occasion, Fed chair Janet Yellen is not scheduled to give a press conference on this occasion which may suggest no major decision is likely to be taken one way or the other though.

But the slightest nuance in Fed-speak that might suggest an interest rate rise being on the cards sooner rather than later will almost certainly put a dent in the gold price.  If an interest rate rise decision was based on U.S. economic data alone then perhaps a rate rise would indeed be on the cards, but the FOMC has also been taking into account the potential effects on fragile economies elsewhere - not just for the immediate impact on these, but because the interlinking of global finance could well have serious repercussions on the U.S. too should  a Fed interest rates rise destabilise the global economy.

So the ensuing statement will be viewed carefully for any references to global economic headwinds, slower domestic growth, inflation targets as well as for any dissent among FOMC members from the decisions taken.

It seems to be generally accepted that gold will be hard hit by any interest rate raising decision, although we feel that any indicated rise, if this should be read into the statement, would be extremely small and the still tiny level of interest rates this would suggest in the U.S. should really have little impact on gold as an investment.  Indeed a number of pro-gold commentators would like to see a decision made to raise interest rates as they feel that once this has happened gold will likely recover afters a perhaps sharp initial fall, and be all the stronger for that.

It could be that the Fed has talked itself into a corner and will indeed start to raise rates by the end of this year.  It has been losing credibility through insinuating that rates will indeed be going up and then failing to deliver.  But if this happens, as noted above, any such rise will be extremely cautious as the Fed would be nervous about the potential impact on U.S. stock markets, which have trended downwards so far this year in any case. The thought of money tightening, as an inerest rates rise would suggest, could tip a largely flat market into itself seeing a major downturn.  And with markets nervous a major downturn could become a rout.

If this should happen, where this would leave gold is a little uncertain.  As in the 2008 financial crash gold could well drop along with the market as good assets might have to be sold for liquidity reasons, but at that time gold was the first asset class to recover and then went on to hit new highs three to four years later.

28 Oct 2015

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