This week’s gold-price action reflects a market once again range bound, searching for direction in an uncertain economic environment. For sure, the risks of further gold-price retreat remain high. Much depends on the market’s sense of prospective Federal Reserve policies.
This Wednesday the financial markets will be listening carefully to the latest Fed speak on monetary policy and the economy for clues.
First off, the FMOC will be releasing the minutes of its April policy-setting meeting — always an interesting document to Fed watchers who, like the Greek oracles, look for meaning in even the slightest change in wording from the previous FOMC meeting minutes.
In addition, financial markets will be listening carefully to Fed Chairman Bernanke’s Wednesday testimony before the Joint Economic Committee.
If that wasn’t enough, financial markets are re-reading yesterday’s somewhat ambiguous speech by Charles Evans, president of the Chicago Fed and a voting member of the FOMC this year . . . and today’s speeches from James Bullard, president of the St. Louis Fed, also a voting member this year, and William Dudley, president of the New York Fed and a permanent voter.
Financial markets — including gold — will be parsing every word for clues about prospective monetary policy, especially with regard to its accommodative bond-buying program.
Any hint of “tapering,” that is cutting back on its $85 billion monthly bond-buying program, could send the dollar higher and gold prices lower. But, most likely, taken in total, all this Fed speak is likely to leave markets still uncertain and confused about the Fed’s intentions.
What will matter more in the weeks ahead is the flow of economic news. If the economy seems to be gathering strength, markets will assume an early reduction in monetary accommodation — and, other things being equal, this could make it more difficult for gold to renew its long-term uptrend.
My sense, however, is that the economic news will not be encouraging. After all, the economy still faces continuing drag from January’s rise in payroll taxes as well as increases in state and local taxes and user fees and from the on-going sequestration-required cuts in Federal spending and resulting worker layoffs and unpaid furloughs.
Importantly, Europe’s deepening recessions and slower growth in China, India, Brazil, Mexico and other emerging economies that are important markets for U.S. exports is taking its toll.
Uncertainty about U.S. fiscal policies, the continuing divide between the White House and Capitol Hill, the approaching U.S. Federal debt ceiling and talk of a downgrade in Treasury debt by the rating agencies later this year is making it difficult for businesses to make long-term investment decisions and for consumers to take on more debt, necessary to sustain household spending.
Optimists point to Wall Street’s strength and the rise in home prices as evidence of an improving economy are looking through rose-colored glasses,
In my book, these asset markets are rising, not because the economy is regaining its health and vigor . . . because the vast quantity of liquidity created each month by the Fed’s bond-buying program has no where else to go — and the computer models that govern much of the action on U.S. and world equity markets are trend followers, seeking the implied yield that comes from going wherever the momentum indicators take them.
Signs the economy is losing ground — and is increasingly at risk of slipping into recession — could be the catalyst to an upside gold-price breakout.
