Gold picks up ahead of Fed interest rate decision

One of the buzz words going around at the moment re. Janet ‘will-she-won’t- she’ Yellen and the FOMC voting to start raising Fed interest rates is ‘normalization’.  But whatever the Fed does it is no way going to be ‘normalization’ in any realistic sense of the word relative to past ‘normal’  interest rate patterns.  The general consensus at the Mines & Money conference in London this past week was that rate rises would almost certainly begin this month as Yellen and the FOMC have talked themselves into a position where not to do so would destroy any remaining credibility that the Fed may actually have brought things under control – but ‘normalization’ – perhaps not..

Let’s face it, interest rate normalization is not raising rates by 25 basis points but more like instigating the start of a raising program which will see them rise to 2.5% or higher and there looks to be no way the U.S. economy is strong enough to handle this even over a couple of years.  Indeed another one of the prevailing thoughts at the Mines & Money conference from some very savvy analysts and commentators was that even if the Fed does raise rates by as little as 25 basis points now, it will likely have to backtrack and bring them down again within the next six months AND then instigate a QE4 on top of that.  The stock markets are weak and potentially on a hair trigger for a massive collapse.  Q3 earnings figures from major companies were mostly pretty dire and the strong dollar is eating into exports, while making imports ever less costly.  Government CPI and unemployment stats are largely a farce.  The market is being held up by sentiment alone – certainly not by fundamentals.  And sentiment can change overnight, sometimes on a seemingly innocuous piece of news.

The gold price performance today, and that of the general equity markets, ahead of any Fed announcement has been perhaps enlightening.  At the time of writing gold has risen about $30 above its recent lows.  Suddenly what had seemed a foregone conclusion that the Fed would start raising rates this month has perhaps run into doubt.  While we await the decision we still feel the Fed is too far down the line not to raise, although we would see the possibility of a smaller rise being implemented.  In some ways the Fed could be damned if it does raise rates, but perhaps even more damned if it doesn’t. A 10 basis point increase would be an uneasy compromise, but has to be a possibility.  However it would be seen as a sign of weakness.

The fall in the dollar index by nearly 2% though would also definitely have strengthened the gold price which tends to move counter to the dollar.  Whether the sharp dollar fall was a natural progression or part of Fed machinations to try and keep the rising currency, seen as damaging to the economy, under some form of control is less certain.

While some key indicators, notably today’s nonfarm payroll figures, are just what the Fed needs to support the interest raising decision, there are others like the recent Chicago PMI figure coming in at 48.7 (anything below 50 is seen as negative) suggests that all is not well in America’s industrial heartland.  Tuesday’s broader ISM manufacturing index figure was equally pessimistic at 48.6, although the ISM services index was positive at 55.9, despite this being a little down on the previous month.  So all in all it does look like the U.S. economy is far from out of the woods.

As noted above, the US Dollar Index dipped back from a brief foray above the 100 mark, back down to a current 98.3, which may have reduced slightly continuing concerns about U.S exports, although this is hardly conclusive.  Mario Draghi’s decision for the ECB to only reduce bank deposit interest rates by a smaller than expected 10 basis points helped here.  A bigger reduction might well have seen the euro move to nearer parity with the dollar.

Gold’s healthy performance today was despite the positive US nonfarm payroll figures and was perhaps down to the feeling that it has been oversold over the past month or so, resulting in a certain amount of short covering.  Markets often react too far in this manner – but even so, if the Fed does raise interest rates by the expected 25 basis points it could take a further knock, but anything less could see it soar.

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U.S. employment figures batter gold

This article was submitted to Mineweb on Friday but as the site seems to shut down for the weekend as far as posting new articles is concerned, it was not published so have taken it upon myself to update it and release it here as the comment remains totally relevant.

Lawrie Williams

A higher than expected non-farm payrolls figure in the U.S. caused the gold price to dive on Friday as the view was that this would mean the Fed would raise interest rates sooner rather than later.

LONDON

The latest U.S. non-farm payroll figures showed an above-expectations rise of 280,000 jobs, while average hourly earnings rose by 0.3%, which again was higher than general expectations.  The immediate knee-jerk reaction on the gold price was to knock it down substantially below its recent $1175 to $1220 trading range and it remains to be seen whether Asian demand at the lower price levels will take it back up again.  So far there has been something g of a recovery back up to the $1175 level so it looks like the support at this kind of level remains with us.

Recent media reports have suggested that both Chinese and Indian demand for gold is slipping – fairly normal for the time of year.  The main early year festival boosts are behind us, as is the Indian wedding season and buying tends to fall in the latter pre-monsoon as well.  It doesn’t look to be an auspicious time for gold.

What really hit the markets though was the assessment that the latest U.S. employment figures would put a U.S. Fed raising of interest rates sooner rather than later back on the table – despite an earlier statement from the IMF effectively saying that the U.S. recovery is not strong enough to raise interest rates yet.  The feeling in the U.S., which for the moment seems to be setting the gold price, is that the stronger payroll figures would justify interest rate increases starting in September and might even put June back in the frame, although with the next FOMC meeting not scheduled until June 17th-18th when it will be coupled with a Janet Yellen Press Conference, the earlier date seems to be too soon to be implemented.  Thus the June FOMC meeting and ensuing statements, will be followed with particular interest by the markets.

There is something of a disagreement among analysts as to what effect the interest rates rise, when it does come, will have on the gold price.  A recent UBS analysis, which looked at the effects of previous U.S. interest rates rises suggested that an upwards move would indeed be negative for gold – with even the suggestion that continuing rises could push the gold price down well below the $1,000 level – disastrous for perhaps around half of the world’s gold mining industry where many producers are struggling to make profits even at current prices.

On the other hand, listening to a panel of gold experts at the recent Bloomberg Precious Metals conference and reading analysis by the major gold analytical consultancies, GFMS and Metals Focus, there has been the suggestion that once interest rate rises begin, they will be seen as being extremely modest with the result that real interest rates will remain negative and that, after an initial downturn, gold will recover quickly and make subsequent gains.  At least once interest rate rises are officially scheduled to begin it should release gold from the ever continuing upwards and downwards moves as economic data suggests that either the Fed will start to raise interest rates soon, or defer such a decision another few months.  Thus it should at least take some uncertainty out of the system.

At the time this article was originally written, the spot gold price had fallen back to around $1165 – a fall of around $12 on the previous day’s COMEX close. With markets closed over the weekend until Asian opening on Monday the price was subdued but pulled back to the $1175 level this morning.  This does suggest that buying does come in at the lower price range – for the moment at least.