LAWRIE WILLIAMS: The Powell 'game changer' for gold and silver

 There’s one thing that can almost be guaranteed to occur around an FOMC meeting and a subsequent statement from Fed head, Jerome Powell.  That is whatever the likely outcome of the FOMC deliberations, the gold price will take a heavy knock even if what occurs in the meeting may actually look positive for precious metals.  Those that would see precious metals prices lower use the FOMC meeting and subsequent statements as an opportunity to try and drive the prices down – and this week’s meeting was no exception – at least initially!

This time around the FOMC’s deliberations, and the official reports thereof, wererather more downbeat on the U.S. economy, due to the ongoing effects of the COVID-19 coronavirus.  There are usually some degrees of optimism forthcoming, but the Fed has a pretty awful track record in its forecasts anyway.  But this latest meeting took place with the U.S. facing the deepest recession in around 100 years, and mired in semi-insurrection as well as facing some global geopolitical headwinds, as a seeming sideshow.

In truth the U.S. Fed usually has to be ultra cautious in what it says and predicts, as anything that is forthcoming would tend to have an immediate effect on equity and precious metals prices.  Thus Fed-followers and economists pore over the nuances of any statement for tiny hints regarding the discussions and projections arising – and these tend to be limited in the extreme – and if recent such meetings are a guide tend to err on the side of optimism, which the Fed may consider part of its brief anyway. But perhaps not this time around and hence the negative market reaction in the equities and a more positive tone for gold and silver.

Initially, the usual pattern did materialise once again. From around 10.30 am Eastern Standard Time the gold price suppressors started to climb in, several hours before the FOMC meeting actually closed and any statement of what had occurred could be released.  The gold price started to drop like a stone, but on this occasion the gold bears certainly did not have it all their own way, given some high profile names, Jeff Gundlach and the commodities analysts at Goldman Sachs, for example,  had been predicting something of a different outcome putting out some very optimistic statements on the likely direction of the gold price and negative on equities markets, and this all helped stop the gold and silver price decline in its tracks.

And then came Fed chair Powell’s address to the Peterson Institute which certainly did not make light of the pretty horrendous economic situation facing the U.S. going forward.  Some might even say that he may have been slightly more optimistic than the current situation warrants.  Quite a change from the rather more optimistic view taken at the previous FOMC meeting.  His remarks were taken to suggest that the recession which is already being experienced was unlikely to play out until well into 2021, and perhaps for longer and that the Fed would continue to ‘do what it takes’ to mitigate its effects on the U.S. economy, thereby suggesting that the current near zero interest rate regime would continue for at least the next year, and quite probably longer, and the huge U.S. debt buildup would continue for the foreseeable future. The high unemployment levels would likely get worse before they get better, but here he was perhaps being optimistic in predicting that unemployment would fall to around 6.5% by next year.

The Fed expects the U.S. economy to shrink by a similar 6.5% this year and the road to recovery to be an extended one.  Some observers and economists see this as perhaps unduly optimistic, but even so such an economic reduction is almost unprecedented and supports the views taken by some mega investors who are staying out of the U.S. equities markets until they feel an end to the recession is in sight, which may not be for several months yet.

Powell’s remarks did have a dampening effect on investment – the markets having been driven up by a vast amount of money, mostly from small investors.  They at last seem to have begun to understand the dire position the U.S. economy is in currently – a similar position to other Western economies.  Similar falls have been seen in Asian and European markets – they may yet have much further to fall once Q2 data starts to be released.  In the U.S., the Dow and the S&P indexes both fell for the second day in a row, although conversely the tech-focused NASDAQ recorded another rise, although we suspect that this may also come back in the weeks and month ahead.  The Nikkei in Japan lost most of its recent gains, as did the major European stock indexes. Gold and silver rose quite sharply and could well be set for further rises once the Fed’s worries about the economy are taken up and analysed by the mainstream media.

Those who have the most to lose from a further uptick in gold and silver will undoubtedly fight a rearguard action to try and keep the gold price below $1,750 and silver below $18, but we think the FOMC deliberations, and the subsequent Powell statement will be enough  of a game-changer to keep precious metals prices rising and precipitate some sharp falls in the global equities markets.  Not before time!

11 Jun 2020

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).

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