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LAWRIE WILLIANS: Gold and silver will recover despite FOMC bombshell

Any hopes we may have expressed for a more cautious outcome to this week’s Federal Open Market Commission (FOMC) meeting were dashed when Fed chair, Jerome Powell, released his report on the event at the subsequent press conference.  As a direct result, virtually all major asset classes in the U.S. were knocked back sharply, followed by most Asian and European markets when they opened.

So what did Powell have to say which so spooked the markets?  His comments on the inflation rate were probably key, as he expressed the view that current inflation was probably in excess of the December figures when there was a Consumer Price Index (CPI) count of 7% on an annual basis.  The Fed’s preferred inflation measure, the Personal Consumption Expenditure (PCE) index seems to be trailing not far behind.

In the event, market reaction to the FOMC meeting and the Powell press conference was perhaps, as seems to be usual after such events and statements, somewhat overblown.  In terms of Fed ongoing policy, little has changed in the short term.  Current interest rates were kept near zero, and the Fed’s tapering timetable was effectively unaltered, with the bond and mortgage security purchasing programme still due for completion by March.  A subsequent interest rate raising programme would then be implemented – all factors which one would have thought would have already been built into precious metal and equity prices as they had largely been forecast by market analysts in advance of the meeting.

But Powell’s statement was seen as decidedly more ‘hawkish’ than previous advance policy statements, particularly with regard to the inflation rate and comments on the likely running down of the Fed’s balance sheet position.  While Powell suggested that economic growth and the jobs market were resilient enough to take these measures in their stride, fears of a recessionary outcome prevailed with a distinctly negative effect.  Analysts and commentators also read into Powell’s statement, although this was not actually specified, that a possible March interest rate rise might be of 50 basis points, instead of the previously expected 25.  While perhaps the actual number of interest rate rises during the year might still be three or four as previously expected, there were fears that the Fed might now be looking at a slightly more aggressive approach to rate rises, with a corresponding adverse impact on equity valuations and precious metals.

The Fed will now be keeping a close eye on market movements, as we assume it has no wish to precipitate a serious equity market downturn, or even a recession – a dirty word that is now on analysts’ lips.  Initial market reactions will be worrying for the Fed, particularly as such doubts have also led to sharp falls in Asian and European equities too.  The all-important japans Nikkei Index plunged by over 3% for example.  If U.S. equities continue to weaken one cannot dismiss a possible Fed backtrack in the next month and at the next FOMC meeting which is scheduled for mid- March.

But what could be the impact on gold and silver?  We think the FOMC outcome is, if anything, verging on being bullish for precious metals and, as time progresses, the markets will see it as such.  Gold usually does well in an inflationary environment and particularly when, as at present, it would seem to offer a better investment position going forward than other major asset classes.  If, as Powell suggests, inflation is still on the up, real interest rates will remain strongly negative, which means that holding gold or silver in an investment portfolio tends to be a far better wealth protector than offered by what appear to be weaker equities or bitcoin.  However, Powell’s statement does seem to have driven the dollar index (DXY) a little higher which could be, for the moment, negative for the precious metals in dollar terms, but not necessarily in terms of competing currencies.

We thus think that when the dust settles on the FOMC meeting that gold and silver in particular will make a decent recovery as they already seem to be beginning to do this morning in Europe.  We don’t see the FOMC deliberations as being bearish for precious metals – indeed quite the opposite.  One needs though to keep a close watch on the progress of U.S. equities and bitcoin.  If these continue to weaken once U.S. markets open then that could be very bullish for gold and silver, but if they turn around and remain steady or start to rise again, that could encourage the Fed to be even more aggressive in its interest raising posture which would not be precious metals positive.  That could lead to a further rise in the DXY which could be precious metals negative overall.  As ever with gold and silver, any outcome could lie ahead, but we remain distinctly bullish for the medium to longer term.

27 Jan 2022 | Categories: Gold, Silver, Dollar, US, FOMC, Bitcoin

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