Fed uncertainty and its impact on gold

By Frank Holmes – CEO and Chief Investment Officer US Global Investors

Federal Reserve Chair Janet Yellen last week blinked in the face of—as she described it—global uncertainty, low inflation, and a still-low U.S. labor force participation rate. I’ve written on the emerging markets slowdown numerous times in recent months, so her reasoning is not at all surprising.

Although interest rates could still be hiked in one of the two remaining times the Federal Open Market Committee (FOMC) meets this year, I’m inclined to think they’ll stay near zero until at least 2016.

Janet-Yellen-interest-rate-liftoff-delayed-again

The decision is a welcome one for both gold demand and new home purchases. When rates rise, gold becomes less attractive for some investors, who are encouraged to exchange their no-yielding gold for income-producing assets.

As for loans on new or existing homes, they don’t necessarily rise and fall in perfect correlation with interest rates—they’re more directly related to the 10-year Treasury bond yield—but there’s a strong psychological connection in many potential homebuyers’ minds.

An interest rate reprieve, then, might encourage borrowers to act before it’s “too late,” helping home sales. This could speed up the multiplier effect, or what occurs when there’s an increase in spending that increases income and consumption greater than the initial amount spent. When people buy a home, they also put carpenters to work, purchase new furniture, hire landscaping companies and more.

The same is true when taxes are lower. It creates less friction in the flow of money.

A Record-Setting Year for Chinese and Indian Gold Demand?

Following Yellen’s announcement, I told JT Long of the Gold Report that the Fed’s decision is a wash for precious metals, oil and gas prices. A rate hike would have likely caused the U.S. dollar to strengthen even further, which in turn would have put additional pressure on commodities.

I’ll be watching China’s purchasing managers’ index (PMI) numbers very closely in October and November to see if manufacturing activity will start to turn up. Since China is such an important consumer of metals and other raw materials, it’s crucial that its manufacturing sector break out of the recent slowdown.

A recent article by Oxford Club Resource Strategist Sean Brodrick points out that China’s gold demand, as tracked by deliveries out of the Shanghai Gold Exchange (SGE), is much healthier than many people believe. So far this year, demand has been 36 percent higher than around the same time in 2014, and 13.5 percent higher than in 2013—which was a record year.

(See also: Yet another massive gold delivery week on the SGE)

Shanghai-Gold-Exchange-Withdrawals-as-of-August
click to enlarge

Chinese gold demand also tends to increase near the end of the year as the Chinese New Year approaches, so it’s possible 2015 could hit a new record.

Demand out of India is likewise surging, reaching 120 tonnes in August, compared to 50 tonnes this time last year. With important Indian fall festivals quickly approaching such as Diwali, the gold Love Trade is in full swing.

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