Uncharted Waters, Gold and Equities Crash in ‘Unbelievable’ Market Overreaction

We think much of the interpretations by the media and analysts of the U.S. Federal Reserve’s latest statements about the likely economic fallout, as the world’s largest economy starts to recover from the COVID-19 virus pandemic are far from accurate.  That is, if the latest, much lower pandemic infection data does not represent a false dawn – which they well may, given the apparent enhanced spreadability of the new Delta virus strain.

At the meeting itself, there were no major changes in the ultra-low interest rate policy, which was coupled with significant quantitative easing (QE), that were implemented.  It was speculated that the Fed might consider raising interest rates earlier than previous forecasts had specified but still probably not until 2023.  With 2023 being two years on the horizon – a time frame of infinite proportions in economic terms leaves a huge opportunity for conditions to change for the better or worse.  Who knows? The Fed’s market forecasting performance in the past has certainly not given us much confidence in its forward market projections.

Nevertheless, the markets’ knee-jerk reactions to the latest Fed forecasting efforts – which suggest there might be interest rate rises implemented by 2023 – were followed by gold being marked down by $100 or so almost immediately, or even slightly ahead of Fed Chair Powell’s post-FOMC meeting statement hitting the wires, all while equities took a bit longer to sell-off, with the Dow ending down over 500 points on Friday. The principal beneficiary was the U.S. dollar index, which rose by more than two points. That, however, is very much a double-edged sword, as the rise will undoubtedly make global goods export prices to the U.S. even more competitive which will show up in yet another big balance-of-payments deficit as the figures filter through.  Indeed, it was the dollar’s strong performance that may well have been the prime driver of the fall in both precious metals and equities.

We were extremely pleased to see that that most realistic of gold commentators, Martin Murenbeeld of the Canadian economic consultancy that bears his name, almost wholly agrees with our take on the market’s reaction to the FOMC news interpretation.  In the consultancy’s latest Gold Monitor newsletter, Murenbeeld comments,

It can’t be too often that a renowned economist like Martin Murenbeeld and a mere mining engineer like myself are in almost total agreement on economic matters – economic theory meets economic pragmatism!

Another point with which we are in full agreement, and one that we emphasized at the end of last week. Murenbeeld goes on to note,

One needs to keep in mind that the Fed’s oft-stated priority is to return the U.S. unemployment to pre-pandemic levels, which is a ways away.  The Fed firmly believes that the best policy to follow to achieve this goal is to continue with its easy and low-cost money initiative, and if this leads to increased inflation, which it is already doing, then so be it.

Murenbeeld’s slightly gloomy conclusions for gold investors on the latest gold price action are as follows, “The gold market fell into a hole this week on the back of a strong dollar and (in our view) a misinterpretation of what the Fed has signaled with its dot plots. To repeat, the Fed will be keeping interest rates well below inflation right out through 2023, regardless of the possibility, it may raise the FF-rate somewhat earlier than the market had interpreted. In our view, the Fed remains in a lower for longer mode, but on this, we clearly seem to be at odds with the market. It could take some time, we expect before the gold market sees it our way.”

Indeed, the Fed may actually be welcoming the current rising inflationary trends.  It has been undershooting its average inflation target for many months, so a period of higher inflation to bring the average up to its planned level may be welcomed. Indeed, in some opinions, including Murenbeeld’s, a higher level of inflation is just what is required to eventually help bring down the record-high debt-to-GDP ratio in the U.S. and elsewhere.

If, however, the Fed is seen to be correct in its repeated proclamation that the rise currently being seen in inflation is indeed only “transitory” (one of the Fed’s current buzzwords), then the precious metals recovery could well be quicker, and stronger than many market analysts expect.  We certainly believe that there is no need for the gold investor to panic and sell off as of now.