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LAWRIE WILLIAMS: Gold struggles to cling on to $1,780.

The awaited turnaround in the gold price has not yet been evident as the powers that be have kept it below its major moving averages.  Today European, and early U.S., trade has seen it slip back even below the $1,780 level it  had seemed to be holding on to.  It will now probably remain range bound between $1,770 and the $1,780s, at least until the results of next week’s FOMC meeting deliberations are made public.   The U.S. Federal Reserve Bank (the Fed), the nation’s central bank, is poised to define policy then on tapering volumes and likely interest rate schedules which could move precious metals prices either way depending on the decisions taken.  The FOMC meetings, which take place every six to seven weeks, tend to define overall Fed policy.

The rising inflationary trend had suggested the Fed might consider raising interest rates sooner than had been earlier anticipated.  However, the high levels of Covid infections and mortalities in the U.S. coupled with a continuing reluctance among some sectors of the population to be vaccinated against contracting the virus, could possibly result in delays if it is felt economic recovery is in danger.  Raising interest rates could be considered an additional negative factor in the country’s progress back towards pre-Covid employment and economic growth levels.  But, recent statements by Fed chair Jerome Powell has indicated that the prospect of faster tapering, and the earlier raising of interest rates, will at least be on the FOMC agenda.  In truth, though, it would be surprising if this were not the case.

The high pandemic infection levels in the U.S. are currently presumably being driven by the very transmissible Delta virus variant.  However, with cases now already appearing of the new Omicron virus mutation, which may be even more infectious, anything that might possibly contribute to economic recovery reversal, could cause the Fed to delay any decisions to speed up tapering and interest rate raising decisions yet again. 

Under Powell’s leadership, the Fed has tended to play an ultra cautious role in guiding the U.S. economy and, in our view may well be likely to continue to do so.  Other central banks  - notably the European Central Bank (ECB) and the Bank of England - have largely been following suit only agreeing to exceedingly cautious measures, although a couple of central banks have broken ranks and have started to raise rates.

The FOMC meeting takes place on the 14th and 15th of this month, followed by a press conference on the latter day and the ensuing statement will be pored over by analysts looking for indications of any possible policy changes in the usually opaquely worded release.  America currently pretty much sets the global agenda in this respect and the gold price tends to react accordingly on any nuances adjudged to be incorporated in the post-meeting press statement.

We are hugely uncertain what the outcome will likely be on this occasion and much will depend on the FOMC participants’ views on the potential threat to the U.S. economy of the spread of the new coronavirus variants and rising inflation.  On past outcomes the Fed may yet set a conservative programme of moves, and any delay in raising rates in particular, or even a reiteration of the existing programme, would be seen as gold positive with real interest rates remaining in distinctly negative territory. 

The Fed is under pressure, though, to raise interest rates as inflation has been running higher, and looks like being with us for longer, than the central bank had previously been assuring us.  Indeed, in his latest statement to the U.S. Congress, Powell has at last conceded that the term ‘transitory’ as applied to inflation increases, is no longer apposite.   It is thus a situation where the Fed will have to try and assess whether raising rates sooner, and possibly thereby prompting a stock market downturn, or holding them steady and risk a negative inflationary impact on the inherent value of the dollar, is the better course of action.  An invidious choice!   We’d suggest that the Fed may probably come down on the latter course – more beneficial for the gold price – but the decision could go either way.

09 Dec 2021 | Categories: Gold, Dollar, US, FOMC

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