LAWRIE WILLIAMS: U.S. Fed statement gives gold a boost

Some speculators appear to have gambled badly on the likely content of U.S. Fed chair, Jerome Powell’s latest statement following this week’s Federal Open Market Committee (FOMC) meeting.  Ahead of the statement the gold price dipped back under $1,300, albeit briefly, for the first time in several days.  But following the release of Powell’s statement it surged higher hitting the $1,320 level very briefly for the first time in just over 3 weeks.  Depending on whose viewpoint on the action one takes the price was capped there by massive volume selling and ended the day about $3 lower than this but still substantially up on the day.  Of course the decline in the dollar index by around 70 basis points may also have had something to do with the better gold price!  But a cap on the increase in the gold price and heavy support for the dollar at the lower level could be considered two sides of the same coin.

The dollar index recovered some of its lost ground in overnight Asian and morning European trading and gold consequently fell back a few dollars but without convincing evidence that the two factors are actually in sync.  While Powell’s Fed statement does not suggest any confidence in the short to medium term prospects for the U.S. economy, it is also apparent that the global economy may also be in an even worse state.

Bur back to Powell’s post-FOMC meeting statement.  There wasn’t anything too surprising in it – or at least there shouldn’t have been – as it largely confirmed what most economic analysts had been predicting regarding Fed tightening over the next several months.  But then perhaps the aforementioned analysts needed semi-official confirmation of their assumptions.

Fed statements are always bordering on the opaque and a perceived change in the domestic, or sometimes international, economic perspective can lead to material changes in forthcoming statements.  Fedspeak analysts have to read between the lines!

The latest statement was thus interpreted as predicting no further Fed interest rate increases this calendar year and perhaps only one rate rise next year.  It was further interpreted to suggest no rate rise in 2021, but that is, in reality, too far ahead for this position not to be materially altered one way or the other at a later meeting.

A number of analysts had also postulated perhaps an interest rate cut as likely this year or next should the U.S. economy perform as badly as they have been predicting.  But perhaps they have not been arguing that convincingly that this is on the cards.  In the event the Powell statement did not suggest this, but perhaps the possibility should not be ruled out should the economy deteriorate further or faster than some are suggesting.  And as to Fed balance sheet reductions, these are seen as taking a back seat this year and are probably ruled out altogether beyond the year end.

Inasmuch as worries about Fed rate rises had been instrumental in keeping the gold price restrained over the past two to three years, the prospect of the Fed backtracking should be positive for gold and negative for the dollar were it not for a similar, or worse, downturn in the global economy.  This may keep the dollar stronger than the Fed, or President Trump, would like.  That correlation would tend to boost imports and hinder exports, thus exacerbating America’s already dire current account deficit and countering any positive effect from the Trump tariff impositions.

So where for the gold price now?  We still think onwards and upwards and certainly $1,400 remains in sight this year – maybe higher.  And if gold regains this level we would expect silver to do rather better with the Gold:Silver Ratio (GSR) coming back to around 70 from its current 85 – which would put silver back at $20 given a $1,400 gold price.  This may be an over-optimistic suggestion re silver but in our view a GSR of close to 85 is unlikely to persist.

21 Mar 2019

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).

e: lawrie.williams@sharpspixley.com