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LAWRIE WILLIAMS: Gold, the dollar and the Fed. Fortunes made and lost?

One has to ask the question – Are some of those in the know making mega-gains on positive and negative statements by US Fed insiders?  The gold price – and that of the other precious metals - yoyos on successive ‘hawkish’ or ‘dovish’ statements on interest rates by key Fed officials. 

These precious metals price movements could be seen as entirely predictable given Wall Street’s obsession with the effect of even a tiny 25 basis point interest rate rise on precious metals prices.  The prospect of higher interest rates has an immediate knee-jerk effect on the markets driving the dollar up and precious metals prices down and nowhere has this been more apparent than in last week’s action following on from a procession of ‘hawkish’ statements from FOMC Board members and regional Fed heads.  These statements raised the Wall Street perceived odds of a March FOMC meeting announcement of a rate increase from around a 20% level (unlikely) to over 80%  (highly likely) in just a couple of days.  Any foreknowledge of such a move could have had an enormous financial impact for anyone in the know.

Now, we are not accusing the Fed grandees of lining their own pockets with illicit gains from their statements themselves – the various regulatory bodies would be down on them like a ton of bricks if they were seen to be so doing.  But the way these things work, advance leaks, even by a matter of minutes, of what may be about to be said can get out and there will definitely be those down the line who would be in a position to take advantage, either directly or by informing friends in Wall Street.  The financial sector is packed with those who would happily take advantage of such leaks – that’s the way the markets work – for better or for worse.

Now we have said beforehand that there should perhaps be a moratorium on statements by key Fed insiders indicating their views on interest rates and other key items of Fed policy, in the days and weeks heading up to the scheduled FOMC meetings when such policies are set.  The information is just too sensitive for today’s markets where even a tiny movement in precious metals prices, or the dollar index, can lead to huge gains or losses in these days of high frequency trading.  So an intra day movement of $20-30 or more in the gold price, or of a couple of points in the dollar index, which we saw towards the end of the week following the various speeches by Fed grandees, could have seen some absolutely enormous financial gains by those playing the markets.  And, as we pointed out above, any foreknowledge of what was going to be said would make betting on the movements in precious metals prices or dollar parity outcomes virtually a slam-dunk certainty.

Even governments see leaks emerge, sometimes intentionally, despite having systems in place to supposedly ensure secrecy.  One doubts the financial sector, or the various regional Feds, are quite so secure in their approach.  As far as the former is concerned we have seen far too many recent instances of collusion and manipulation to have any confidence in the regulatory systems.  So will the systems in place to prevent advance knowledge of key individuals’ forthcoming speeches and statements be any better?

Fed Chair, Janet Yellen, though tends to be more circumspect in her statements.  Speaking on Friday there was an expectation that she would confirm the views of those Fed colleagues whose speeches during the week had such an impact.  Indeed she may have slightly dampened the view – although only in response to a question – by commenting that her speech in Chicago gave no hint one way or the other of a likely Fed rate increase decision at the March FOMC meeting which is taking place in just over a week’s time – although she did apparently confirm that a March rate hike might be ‘appropriate’.   Given all the statements which have come out during the past week we would also anticipate that the March meeting will indeed suggest raising rates by 25 basis points failing some catastrophic data or geopolitical event in the meantime.

What is perhaps strange in the Fed’s forecast rush to raise rates in March is that, apart from vague promises, there is as yet no indication of what President Trump’s proposed economic stimuli and tax cuts will be, their likely timetable – or even whether they will take place at all.  Surely it is thus still too early to raise rates even though US economic data seems to be meeting most of the parameters the Fed says it needs to implement the next rate rise?  The statistics it relies on have been manipulated over the years by successive governments to present a perhaps more optimistic view of the U.S. economy than is justified in fact – we suggest one looks at John Williams’ (no relation) data which notes that the CPI, GDP and employment numbers run counter to most peoples’ personal and business experiences. The problem lies, says Williams, in biased and often-manipulated government reporting which, over the years, has moved the goalposts of how the data is compiled.  Shadowstats data presents the figures in a manner which removes these anomalies.

But, despite the pros and cons of interest rate increases, the Fed has now perhaps painted itself into a credibility corner with respect to a March increase.  Whether gold has taken the likelihood of a rate rise into account as yet remains to be seen.  However we would anticipate a fall in the gold price, albeit perhaps a shortlived one, from wherever it is on March 15th, when the FOMC deliberations are made public, assuming it does go for an increase at that time.  Past patterns suggest a knee-jerk fall in price when such decisions are made with those who would like to see the price lower climbing into the paper gold markets to push it down concurrent with any announcement.  

04 Mar 2017 | Categories: Gold, Dollar

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