LAWRIE WILLIAMS: Gold spooked by the Fed but why?
It’s nearly always an invidious task to try and second guess the outcome of a U.S. Federal Reserve meeting, and the latest Federal Open Market Committee (FOMC) meeting, which came to a conclusion yesterday was no exception. The subsequent Press Release issued by Fed Chair, Jerome Powell, was thus awaited with bated breath for any news on size and time of tapering of the Fed’s bond purchasing programme., any hint on the timings of possible interest rate rises and the Fed members’ consensus views on inflation and the recovery, or otherwise, of the post-COVID recovery . While all this data is connected there had been much speculation surrounding Powell’s statement on all of this with different analysts expressing differing views.
In the event the gold price in advance of Powell’s post-meeting statement was somewhat up and down. The Fed remained its non-committal self and given that no set date for the commencement of tapering was delivered, and any move to increase the Federal Funds interest rate looked perhaps even further away, one might even have expected the gold price to advance. Instead it came off a few dollars in relation to the previous day’s close. We suspect the markets may correct this seeming anomaly in the days ahead when the Fed’s position has a bit more time for further analysis. European trade today has already seen a small uptick in gold an d silver prices, after earlier weakness.
There had been broad expectations that a more definite tapering timetable would have been forthcoming. However, Powell’s statement was as follows: “if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.” So no change there, although he did go on to say that tapering might commence “as soon as the next meeting”, which will take place in November, and also indicated the bond purchasing process might be completed by midway through 2022. But as usual with Fed statements any timing was hedged around with ‘maybes’. Prior to the meeting it had been widely anticipated that tapering would be initiated sooner than Powell’s statement suggested - perhaps late this month, so such an unspecified delay, albeit likely a short one, might have been seen as gold positive.
Powell did confirm that economic recovery seemed to be proceeding as expected and he was still unworried about rising inflation but did intimate that there were still unknown factors at play which could change things going forwards.
COVID-19 is still a problem in the U.S. and although the rate of new infections seems to be stabilising, it remains very high and the mortality rate is disturbing. The latest figures for Wednesday showed new infections recorded totalled just above 130,000 new cases, but over 2,000 deaths – still very worrying statistics and sufficient to derail any economic recovery if infections worsen again.
All in all, so far any fallout from the FOMC meeting deliberations has been somewhat limited with gold perhaps beginning to see some upwards momentum as I write. The key will probably be the timing of future Fed Fund interest rate rises – and the FOMC meeting participants seem to be split down the middle as to whether interest rates should rise next year – none of them seem to be pushing for a rate rise this year. 2023 and 2024 seem to be the preferred dates for rises to commence, but whether they will rise by 25 basis points or even perhaps as much as 75 basis points remains in the balance. In either case real interest rates as being experienced by the general public will likely remain negative with inflation probably remaining above 3% or higher. All still positive for gold in the medium to longer term.