Gold’s latest pullback in May short-circuiting strong seasonals
frustrated plenty of traders. It was driven by heavy gold-futures
selling in response to a sharp US-dollar rally, which in turn was
partially fueled by hawkish comments from top Fed officials. When
they advocate for more rate hikes, the dollar catches a bid spawning
gold-futures selling. But traders weight Fedspeak way too highly
given its dismal track record.
In
my line of work as a professional speculator and
financial-newsletter guy, I closely watch the markets all day every
day. For a quarter century now I’ve studied real-time price
action and newsflow, focusing on what is moving markets and
why. As each trading day unfolds, I actually type up notes
including links to relevant articles and charts. Running up to a
couple pages a day, these are later used to write newsletters.
This
play-by-play knowledge is essential for successful trading, as price
trends are built on causal chains of newsflow. Understanding their
cause-and-effect progression is necessary for gaming whatever is
likely coming next. It’s not enough to know that gold or the
benchmark US Dollar Index moved significantly on any given trading
day, why they moved is more important. Fedspeak has played
an increasing role lately.
Gold’s current upleg was really strengthening in early May,
powering up 26.3% in 7.2 months to $2,050 on the 4th! That was
within spitting distance of the yellow metal’s nominal
all-time-record closing high of $2,062 in early August 2020. Gold’s
latest high-water mark came the day after the Fed’s Federal Open
Market Committee hiked its federal-funds rate by another 25 basis
points to a range midpoint of 5.13%.
Gold’s short-term price action is dominated by
speculators’
gold-futures trading, because of the extreme leverage inherent
in that realm. They look to the US dollar for their primary
trading cues. As gold surged in early May into and after that
latest FOMC meeting, the USDX was drifting along near recent lows.
In a bear market after
shooting
parabolic last year on the Fed’s extreme rate hikes, it hit an
11.7-month low in mid-April.
Hawkish Fedspeak sure wasn’t the only reason gold and the dollar
reversed hard since. Gold was really overbought then,
stretched way up to 1.132x its 200-day moving average. Even though
that remained well under upleg-slaying extremes above 1.160x,
serious overboughtness greatly ramps odds for healthy pullbacks to
rebalance sentiment. And the USDX was oversold at 0.956x its own
200dma, arguing for a bounce.
FOMC
monetary-policy meetings are held about every six weeks, with
decisions released Wednesdays at 2:00pm. Interestingly leading into
those, top Fed officials are subject to formal blackout periods
where they can’t speak publicly or grant interviews. Those run from
the second Saturdays before meetings to the Thursdays immediately
after. So from April 22nd to May 4th, there was no Fedspeak during
the latest blackout.
Gold’s counter-seasonal May pullback ignited on Jobs Friday the 5th
with a 1.6% loss. That was mostly driven by another big upside
surprise in April’s monthly US jobs report, with 253k jobs
reportedly added compared to +180k expected. But a late-day gold
rebound was scuttled by comments from the St. Louis Fed’s
president. The Federal Reserve is actually a central-bank system
comprised of twelve regional banks.
That
afternoon he told reporters, “the aggressive policy we pursued in
the last 15 months has stemmed the rise in inflation, but it is not
so clear we are on” a path to the Fed’s 2% inflation target. He
declared he would need to see “meaningful declines in inflation” to
convince him more rate hikes weren’t necessary. Traders carefully
listen when top Fed officials speak, moving futures-implies
rate-hike odds accordingly.
The
USDX’s technical bounce really accelerated a week later, surging a
big 1.2% across the 11th and 12th which pushed gold a proportional
1.0% lower. That was mainly due to mounting fears Congress would
fail to reach a US-debt-ceiling deal in time to avert a technical
default, Fedspeak wasn’t a factor. Those worries flared again on
the 16th, driving safe-haven dollar buying slamming gold 1.3% lower
to $1,989.
That
was its first close below the psychologically-heavy $2,000 line in a
couple weeks, really accelerating the pullback-fueled bearish
sentiment shift. Then the USDX’s biggest daily surge in May up 0.7%
ignited a couple days later on the 18th. The resulting huge
gold-futures selling slammed gold another 1.3% lower to $1,957.
More hawkish Fedspeak was responsible, extending gold’s total
pullback to 4.5% in a couple weeks.
In
addition to the dozen regional-Fed presidents, the FOMC also
includes the Federal Reserve Board of Governors. It has seven
members appointed by US presidents and approved by the US Senate for
14-year staggered terms. The Fed chair and vice chair are
always two of these seven. That day there was a phalanx of hawkish
comments from a governor and two regional Fed heads, which really
moved markets.
The
new Dallas Fed president spoke in San Antonio, warning “The data in
coming weeks could yet show that it is appropriate to skip a
meeting. As of today though, we aren’t there yet. We haven’t yet
made the progress we need to make. And it’s a long way from here to
2% inflation.” Soon after a Fed governor at a different venue added
“Inflation is too high, and we have not yet made sufficient progress
on reducing it.”
“Outside of energy and food, the progress on inflation remains a
challenge.” Then later that St. Louis Fed president, who is the
most flamboyant and attention-craving top Fed official, chimed in
again declaring “it may warrant taking out some insurance by raising
rates somewhat more to make sure that we really do get inflation
under control”. Futures-implied rate-hike odds at the FOMC’s
mid-June meeting surged on all that.
After gold started bouncing, more hawkish Fedspeak turned it south
again on the 22nd. Regarding hiking the FFR again at the FOMC’s
next meetings, the Minneapolis Fed leader said “What’s important to
me is not signaling that we’re done ... it may be that we need to go
north of 6%”. That would require four more 25bp hikes this year,
even after the Fed’s blistering 500bp of hiking off zero in just
13.6 months into early May!
Never one to be upstaged for long, that ostentatious St. Louis guy
opined “I think we’re going to have to grind higher with the policy
rate in order to put enough downward pressure on inflation and to
return inflation to target in a timely manner ... I’m thinking two
more moves this year ... I’ve often advocated sooner rather than
later.” That uber-hawkish Fedspeak helped drive the dollar
higher and gold lower for a few days.
By
the 25th, gold’s total mid-May pullback deteriorated to 5.4% over
several weeks. That sizable selloff was fueled by increasingly-big
gold-futures selling spawned by the US Dollar Index’s parallel 2.8%
surge in that same span. Both moves proved big reversals, as
apparent in this chart. It superimposes Fed rate hikes over both
the USDX and gold, which have been highly inversely correlated
over the past year or so.
Again it’s important to realize that Fedspeak wasn’t the only driver
of the dollar bouncing and gold selling off in May. Plenty of other
newsflow contributed, particularly major US economic-data releases
including monthly US jobs, consumer inflation, wholesale inflation,
and retail sales. But futures-implied rate-hike odds really surged
on the above and other hawkish comments from top Fed officials,
driving gold-futures trading.
Thankfully this latest Fedspeak stretch is winding down, with the
formal blackout period leading into the FOMC’s June 14th meeting
starting this Saturday the 3rd! So for most of the next couple
weeks, federal-funds futures, the US dollar, and gold are going to
be trading without hawkish spewings from top Fed officials bullying
them around. That should either slow or reverse the dollar’s bounce
and gold’s pullback.
After intensely studying the markets for decades, I’m really
surprised traders take Fedspeak so seriously. The vast majority of
Fedspeak moving markets comes from those twelve regional-Fed
presidents, which are a diverse and colorful lot quick to opine on
Fed monetary-policy direction. The political-appointee governors in
Washington are generally much quieter, speaking way less often and
more reluctant to move markets.
The
great irony of all this is those regional Fed heads driving Fedspeak
newsflow are merely figureheads with no real power! The
Federal Open Market Committee has twelve voting members who decide
Fed monetary policy at each meeting. Those seven governors
including the chair and vice chair always have seven of those twelve
votes. They have an ironclad controlling majority by design, and
always vote together.
So
the remaining five FOMC votes held by regional Fed presidents are
meaningless, always outgunned. The New York Fed president has a
permanent vote due to its closeness with stock markets. That leaves
an inconsequential four remaining votes to be split among the
eleven other regional Fed heads! Those are rotated among those guys
on an annual basis with Chicago, Dallas, Minneapolis, and
Philadelphia in for 2023.
With
all the monetary-policy power concentrated in the hands of the
governors, why do traders even care what the regional Fed presidents
are saying? Yes they all come to all monetary-policy meetings,
sitting at the table participating in discussions. But with only a
third of the FOMC votes, their opinions really don’t matter.
By all accounts the Fed chair persuasively controls the meetings,
and the governors vote with him.
So
when he speaks, traders really do need to listen! If he says
something implying a diverging monetary-policy path from what
traders expect, markets need to move to adjust to that. But
regional Fed heads talking are just noise. Those figureheads are
powerless to sway the FOMC. Even worse, they have a dismal track
record in predicting Fed rate decisions that should destroy their
credibility as forecasters.
With
every-other FOMC meeting, the Fed publishes a Summary of Economic
Projections detailing where top Fed officials expect key metrics to
head in the future. Individual forecasts from all FOMC members
including both governors and regional Fed presidents are aggregated
and anonymized. Those guys all project where they expect US GDP,
core PCE inflation, and the federal-funds rate to go in coming
years.
The
latter is summarized in the famous dot plots, which traders
foolishly take as gospel even though the Fed chair himself
periodically argues against putting too much stock in them! Just
like traders betting with mature price trends, Fed officials’
forecasts are almost always wrong near major turning points
in rates. The FOMC’s maiden rate hike in today’s monster hiking
cycle arrived almost 15 months ago in mid-March 2022.
Since then the FOMC hiked that epic 500 basis points to that
midpoint target-range FFR level of 5.13%. Yet at that very meeting
when the Fed birthed this rate-hike cycle, those same top Fed
officials who did all that hiking predicted the FFR exiting 2022
at just 1.88%. But the actual FFR midpoint at the end of last
year was radically higher at 4.38%! These are mere mortals with no
crystal balls, and often change their minds.
The
latest dot plot was released at the FOMC’s second meeting ago in
late March 2023. Then these top Fed officials expected the FFR to
remain at its current 5.13% at year-end 2023. After seeing the dot
plot fail miserably to predict future FFR levels for years, it would
be shocking if this latest one proves correct. Traders now think
the Fed will have to start cutting soon, to combat a
recession fueled by its aggressive hikes.
There are many examples of top Fed officials’ FFR outlooks in those
quarterly dot plots proving wildly inaccurate compared to what
actually happened. I’ve written extensively about them in our
newsletters over the years, as dot plots can really move the dollar
and gold. Given the Fed guys’ terrible track record for actually
forecasting future FFR levels, traders really shouldn’t care much
about what they’re saying.
Gold’s sizable 5.4% May pullback was driven by heavy gold-futures
selling in the face of a parallel big 2.8% surge in the US Dollar
Index. All that was mostly fueled by rising futures-implied
Fed-rate-hike odds at coming FOMC meetings. Hawkish Fedspeak
played a big role in driving traders’ shifting expectations like
usual. And most of that came from the regional Fed presidents who
are a permanent minority on the FOMC.
Collectively they have no power to set or alter the Fed’s monetary
policy unless the controlling governors want to. And that phalanx
of aggressive Fedspeak is ending as the next blackout period ahead
of the FOMC’s upcoming mid-June meeting starts Saturday. So there’s
a good chance May’s gold pullback and USDX bounce both driven by
that Fedspeak will stall or reverse in coming weeks, which is
bullish for gold.
While gold’s sizable pullback last month did ramp bearish sentiment,
it really wasn’t a big deal in the grand scheme. Back in February,
gold suffered a
bigger 7.2% pullback triggered by an epic upside surprise in
monthly US jobs. But that didn’t last long, and gold soon
reversed hard to power 13.2% higher into early May almost
achieving that new nominal record close! But unfortunately
gold-stock traders still freaked out.
During May’s several weeks when gold fell 5.4%, the leading
benchmark GDX
gold-stock ETF plunged 15.2%! That made for 2.8x downside
leverage to gold, on the high side of the major gold miners’ usual
2x-to-3x range. That overdone gold-stock dumping is leaving some
great bargains in its wake, even in fundamentally-superior
smaller mid-tier
and junior gold miners. So gold-stock traders should be
preparing to buy.
This
powerful gold upleg is due to resume soon with the Fed running out
of room to keep hiking. That will lower the efficacy of Fedspeak
jawboning to move markets. With June being the
peak
summer-doldrums month for both gold and its miners’ stocks, the
timing of gold’s reversal may drag out a bit. But traders need to
be ready with a great-gold-stocks shopping list. Once gold-futures
buying returns, it should multiply fast.
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The
bottom line is gold’s hawkish-Fedspeak-driven May pullback has
likely mostly run its course. Top Fed officials have been talking
tough on future rate hikes, but now they have to quit with the next
FOMC meeting nearing. That should help reverse recent heavy
gold-futures selling into buying, reigniting gold’s interrupted
upleg. Battered gold stocks will fly higher with gold, earning fast
gains for smart contrarians.
Futures traders really ought to stop worrying about Fedspeak
anyway. Top Fed officials have a dismal track record of predicting
rate trends, especially near turning points. And the regional Fed
presidents who are responsible for most market-moving Fedspeak
collectively have no real voting power in the FOMC. As traders
figure this out and the Fed runs out of room to keep hiking,
Fedspeak’s impact on gold should dwindle. |