FOMC Minutes Push Gold Price Down

By: Arkadiusz_Sieron

July FOMC minutes hit the gold prices. But what’s next for the yellow metal?

The key event last week was the publication of the minutes from the FOMC meeting in July. After their release, the U.S. dollar jumped, while the price of gold dropped, as the chart below shows. Why? Well, the Fed officials disappointed investors who expected some clues about upgrading the U.S. central bank’s forward guidance in September. In other words, the Fed failed to provide any new guidance as to the interest rate expectations.

And, perhaps even more importantly, the discussion among the FOMC members shows that they do not want to introduce the yield curve control, at least not now, as costs outweigh benefits:

Of those participants who discussed this option, most judged that yield caps and targets would likely provide only modest benefits in the current environment, as the Committee's forward guidance regarding the path of the federal funds rate already appeared highly credible and longer-term interest rates were already low. Many of these participants also pointed to potential costs associated with yield caps and targets. Among these costs, participants noted the possibility of an excessively rapid expansion of the balance sheet and difficulties in the design and communication of the conditions under which such a policy would be terminated, especially in conjunction with forward guidance regarding the policy rate. In light of these concerns, many participants judged that yield caps and targets were not warranted in the current environment but should remain an option that the Committee could reassess in the future if circumstances changed markedly.

Hence, the minutes were interpreted as less dovish than expected, so investors sold gold and bought the greenback. The hawkish FOMC minutes coincided with some positive economic reports from the U.S. that also supported the dollar. In particular, the flash U.S. Composite PMI Index jumped from 50.3 in July to 54.7 in August, the highest level since February 2019. Importantly, the service sector recorded the first rise since the start of the year. Meanwhile, the comparable indices for the eurozone came in worse than expected, which helped the U.S. dollar against the euro.

Moreover, housing market has improved. In July, the housing starts rose 22.6 percent compared to June, while the existing home sales soared 24.7 percent, marking two consecutive months of significant sales gains.

Implications for Gold

What does it all mean for the gold market? Well, the expressed aversion to the yield curve control is indeed negative for gold prices. Without fresh dovish declarations from the Fed, the market interest rates may increase, creating downward pressure on the gold prices.

However, with or without the yield curve measures, the Fed is even not thinking about thinking about hiking the federal funds rate. So, the fundamentals remain bullish for gold. What we are observing right now, is a much needed consolidation phase. After all, the real interest rates will remain in the low to negative territory for years. The public debt is soaring. The pandemic continues to wreak havoc within the economy. And the FOMC is aware of this. The minutes acknowledges that

the projected rate of recovery in real GDP, and the pace of declines in the unemployment rate, over the second half of this year were expected to be somewhat less robust than in the previous forecast.

and that

through June, only about one-third of the roughly 22 million loss in jobs that occurred over March and April had been offset by subsequent gains

Yup, only about one-third! So, the economy is still far from being normal, and the uncertainty surrounding the economic outlook is elevated. The upcoming presidential election and tensions between the U.S. and China contribute as well.

So, don’t believe that the Fed has become hawkish suddenly and that gold’s bull market has ended. On the contrary, we could see new dovish moves by the U.S. central bank in the future:

Noting the increase in uncertainty about the economic outlook over the intermeeting period, several participants suggested that additional accommodation could be required to promote economic recovery and return inflation to the Committee's 2 percent objective.

This week is crucial, as the annual Jackson Hole symposium is taking place and Fed Chair Jerome Powell is scheduled to speak on Thursday. If we see a hawkish turn, then, of course, gold may suffer. However, the Fed is likely to remain dovish, and it may even strengthen its dovish stance, which would support gold prices.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter.  Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

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.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.