The past week’s action in the gold price has been largely fueled by analysis of the deliberations at last Tuesday’s and Wednesday’s Federal Reserve Open Market Committee (FOMC) meeting. As seems usually to be the case, little resulted to indicate any change in the Fed’s views on U.S. economic progress – still positive – nor any sharp changes in policy going forwards. Indeed, if anything, analysis of the subsequent press conference and Fed chair Jerome Powell’s statements following the meeting seemed to confirm that the Fed is planning, at present, to extend its low to negative interest rate policy until at least 2023, or indeed, even lower its rate expectations with a new federal funds rate target of zero to 0.5% - down from the previous 1-1.25%.
Further, Powell also confirmed that the Fed would continue with its current Quantitative Easing monthly program of accumulating around $80 billion in U.S. Treasuries and a further $40 billion in mortgage-backed securities, with no real end rate in sight. He intimated, though, that this policy would be continually reviewed relative to economic data – one of the weapons the Fed has in its armory for fine tuning the country’s economic progress coming out of the COVID-19 pandemic induced economic turndown. For the time being at least, Powell feels that this is the right policy to follow.
Following shortly after U.S. President Joe Biden’s signing of the estimated $1.9 trillion American Rescue Plan Act, one might have thought the markets would be ecstatic and would thus surge upwards, but all had been well telegraphed in advance and had been largely discounted by both the equities and precious metals markets. It also seemed to raise as many questions as answers.
Unlike the previous FOMC meetings, when the gold bears had tended to seize the initiative and drive prices lower, despite seemingly positive data, this time around, the gold price did advance, but far from spectacularly, and was brought down again the following morning, given an advance in bond rates, to which gold tends to react negatively. However, the price subsequently picked up a little again and the yellow metal did manage to end the week almost $20 higher than a week earlier, but still some $10 below its Wednesday peak. Gold did, however, start the current week a little weaker in Asian and early European trade, although, it did seem to be picking up a little at the time of writing.
It is perhaps worth noting, though, that last week’s gold price increase was in the face of both higher bond yields and a rise in the U.S. dollar index – to both of which gold usually reacts negatively. The Fed seems to be focusing on bringing unemployment levels down, and is currently relatively relaxed on interest rates. On past experience, it will have taken into account the almost immediate turndown in the economy and the highly visible equity market indexes that occurred when interest rates were raised, perhaps prematurely, back in 2016 and the following couple of years or so. The Fed has a stated inflation rate target of an average of 2%, a level at which rates have stubbornly remained below, so we suspect the Fed may tolerate a temporary (our emphasis) increase to around 3%, or even 4%, in an attempt to bring its average target back on track.
Here, we note the gold bottom line opinion from Canadian consultancy, Murenbeeld & Co., in its latest Gold Monitor weekly newsletter, which retains a positive outlook on the gold price: “Were long yields to rise in coming weeks to a point where the Fed felt this rise might threaten the economy, we expect the Fed to take countersteps (which will include more QE and/or rate suppression). We do not see Fed policy as negative for the gold price; more likely Fed policy will be quite bullish for gold!”
These are very much our own views, too. Martin Murenbeeld, who leads the consultancy that bears his name, is one of the most able, accurate and consistent commentators on the likely progress of the gold price, and he thus remains cautiously optimistic on the yellow metal’s likely progress through the remainder of the year.
The Murenbeeld consultancy’s most recent forecast for the likely Q4 average price for gold this year is $2,127, but we suspect this may be revised downwards in light of gold’s performance so far, which has been more in line with the consultancy’s most bearish scenario, which puts the Q4 average at $1,755. In our view, that is probably overly pessimistic, and the likely level may well be somewhere between the two. Our own forecast was for gold to end the year at, or about, $2,225, but this is also looking too positive as things stand and may require a revised set of forecasts at around the mid-year mark.
Undoubtedly, the U.S. economy seems to be picking up faster than originally anticipated, and the vaccine rollout, which could be something of a game changer, providing there isn’t too much vaccine resistance, seems to be proceeding quite well at the moment. However, there is a fear that some, mostly Republican controlled states may be relaxing virus control measures too quickly, in attempts to get their economies back on track.
There is indeed something of a political trade-off between potential infections and likely deaths against economic revival. State and federal governments seem to be faced with a “damned if you do, damned if you don’t” scenario that doesn’t make for easy decision making and tends to generate partisan praise or criticism in retrospect. National figures for new infections and deaths are certainly still higher than desirable. Let’s hope the somewhat mixed policies do not lead to the development of a new wave of virus infections anywhere in the nation.