The Fed Grows Concerned - Should Gold Investors Do The Same?

October 11, 2019

The Fed released the minutes from its last meeting yesterday. What can we learn from the new light they shine on the U.S. monetary policy? How will it affect the gold market?

Minutes Show That FOMC Members Are More Worried Now

The minutes from the Sept FOMC meeting show that the Fed is more worried about the economy. The Committee members noted that downside risks had become more pronounced due to the increased trade conflicts, more intensified geopolitical uncertainty, and more fragile prospects for global and domestic economic growth:

Participants generally judged that downside risks to the outlook for economic activity had increased somewhat since their July meeting, particularly those stemming from trade policy uncertainty and conditions abroad. In addition, although readings on the labor market and the overall economy continued to be strong, a clearer picture of protracted weakness in investment spending, manufacturing production, and exports had emerged. Participants also noted that there continued to be a significant probability of a no-deal Brexit, and that geopolitical tensions had increased in Hong Kong and the Middle East. Several participants commented that, in the wake of this increase in downside risk, the weakness in business spending, manufacturing, and exports could give rise to slower hiring, a development that would likely weigh on consumption and the overall economic outlook.

Moreover, the participants also expressed their concerns about something we have been writing about for months, i.e., the inverted yield curve and increased odds of recession in the near future:

Several participants noted that statistical models designed to gauge the probability of recession, including those based on information from the yield curve, suggested that the likelihood of a recession occurring over the medium term had increased notably in recent months.

Implications for Gold

What does it all imply for the gold market? Well, the latest FOMC minutes show that the Fed’s assessment of balance of risk became more bleak. The recent downturn in manufacturing can only strengthen the pessimistic stance of the FOMC. Plus, Trump has just introduced travel bans on Chinese officials and trade bans on certain China companies – and that doesn’t bode well for a swift, lasting and comprehensive trade disputes resolution. And the odds of no-Brexit deal have increased.

Yes, the labor market remains strong. But in a sense, it only confirms the dismal outlook: companies hire workers instead of investing in capital equipment because they are unsure of the future and it’s it is easier to fire employees than to write off investments.

Hence, although the recent minutes are not revolutionary, they indicate that the FOMC may trim interest rates in October (or in December) for the third time this year already. Yes, the macroeconomic data does not justify another cut, but the downside risks are still present while the industrial sector entered recession. And this is simply what the markets want, given the high bets on the dovish move. Yes, some FOMC members are against it. But the Fed may simply deliver a cut with attached hawkish message.

This is good news for the gold market. Sure, as this is exactly what markets expect, the move would probably not significantly impact the price of the yellow metal. However, it creates a conducive environment for gold prices from the fundamental point of view. The bullion gained initially after the minutes were published, as the chart below shows.

Chart 1: Gold prices from October 8 to October 10, 2019.

This supportive environment is a dovish shift among the U.S. central bankers. On Tuesday, Powell said that the Fed would “soon announce measures to add to the supply of reserves over time.” So, what if investors took steps to add to their gold holdings over time?

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Arkadiusz Sieron
Sunshine Profits‘ Gold News and Gold Market Overview Editor

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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Arkadiusz Sieroń is the author of Sunshine Profits’ monthly gold Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes. Arkadiusz is a certified Investment Adviser, a long-time precious metals market enthusiast and a Ph.D. candidate. He is also a Laureate of the 6th International Vernon Smith Prize.  You can reach Arkadiusz at Sunshine Profits’ contact page.

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