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LAWRIE WILLIAMS: Gold stuttering on Jackson Hole aftermath

Will the U.S. Fed decide to put up rates by 25 basis points in September or not?  That is the question afflicting the precious metals sector at the moment following statements perceived as marginally hawkish from Fed Chair, Janet Yellen, and in particular from Fed Vice Chair, Stanley Fischer.  While neither pointed directly to a September increase, they both noted what they see as improving U.S. economic data, and the Fed has always indicated that the next rate hike will be data driven.

In particular Fischer commented in a post-Jackson Hole interview yesterday that the U.S. job market is just about where it needs to be (according to government statistics which are hugely massaged) and that rate rises will continue to be dependent on the Fed interpretation of U.S. economic data.  One would have thought this would suggest ‘no change’ in Fed policy, but it is the tiny nuances in such statements which seem to move the gold market..

Now the odds of a September increase are still seen as fairly low – December is seen as far more likely and there are still those who aver that even a December rate hike is too soon.  But tiny moves in sentiment in a thin market can have an undue impact on precious metals prices.  This morning, for example, gold has fallen back another few dollars and is sitting comfortably below the trading range established during the first half of the month, while the dollar is a little stronger.  Indeed much financial commentary seems to suggest it is the ‘strong’ dollar which is driving the gold price downwards, in US dollar terms, although seemingly forgetting that the US dollar index was far stronger at the beginning of the year when the gold price began its six month upwards move.

As we have pointed out beforehand, a 25 basis point rise in interest rates should not really make much difference to gold’s fundamental prospects.  Inflation, according to Fischer, is pretty much on target which means that even a small rise in interest rate rises of the likely kind of magnitude the Fed might implement means that for most people they will remain effectively in negative territory.  What will most likely guide the Fed in its decisions though is the possible impact of a rate rise on general equities, which might only need a small downwards nudge that even a small tightening might see, to come sharply back from what many analysts see as unsustainable record highs given that corporate performance figures do not support such a high flying stock market.  To risk this only six weeks ahead of the US Presidential election, would probably see yet another deferred decision at the next FOMC meeting due for September 20th-21st.  There is general consensus that no rate rise decision would be made at the scheduled November meeting (1st and 2nd) which is far too close to the Presidential election (Nov 8th) which perhaps leaves the December meeting (13th and 14th) as the likely earliest date for any increase announcement – or even end January 2017 if data is not seen as stacking up sufficiently by the year end. 

If the Fed does not increase interest rates at least once this year it remains in danger of losing even more credibility given that, last December, it was suggesting three or four increases towards what it sees as rate normalisation during the current year.  This certainly suggests that rates will indeed be raised this year, but perhaps not until right at the year end with a new US President in office.

31 Aug 2016 | Categories: Gold

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