Yesterday, the July Summary of Commentary on Current Economic Conditions by Federal Reserve District, commonly known as the Beige Book, was published. What are the implications of this report for the gold market?
We have not covered beige books for some time, but yesterday’s edition is quite interesting and we decided to write about it. The most important information is that “consumer spending was generally positive but with some signs of softening”. It should be positive news for the gold market, as consumer expenditure is believed to drive the U.S. economy. It may be a signal that consumers are worried about the economic outlook after the Brexit vote and prefer to limit spending and increase precautionary savings.
Indeed, the Beige Book shows that the outcome of the British referendum weighs on the outlook in some regions. For example, in the Boston district, “a number of contacts cited the UK's "Brexit" vote to exit the European Union as a downside risk to aggregate economic growth”, while in the Chicago region “financial market participants reported a significant increase in volatility, driven primarily by the United Kingdom's vote to exit the European Union.” In the Dallas region, “outlooks were generally positive but more cautious, with the upcoming presidential elections and the Brexit vote driving some of the uncertainty” and “contacts cited heightened uncertainty in their outlooks following the Brexit vote, and were more pessimistic than in the previous reporting period”.
However, other regions did not cite the UK’s referendum as a downside risk. And one contact from Boston argued that “instability in Europe could boost foreign investment in the U.S.”. Thus, we can say that the Brexit vote increased uncertainty, which is positive for the shiny metal, but did not trigger serious and prolonged financial turmoil. And it seems that it has not hampered the U.S. economy significantly so far. Economic growth was modest, labor market conditions remained stable, manufacturing activity improved, real estate activity continued to strengthen, and the outlook was generally encouraging.
Summing up, the July Beige Book was positive, but it noted some signs of softening in consumer spending. Moreover, price pressures remained slight, while some contacts expressed concerns about the consequences of the Brexit vote. It seems that the uncertainty will remain at an elevated level until the U.K and the EU establish the terms of their new relationship. All these factors are good for gold, as they should make the Fed reluctant to hike in the nearest future. Indeed, the expected path of the federal funds rate for the medium term implied by market quotes declined yesterday. The price of gold increased – perhaps because of the flatter expected path of the federal funds rate, but other reasons include the decreased risk appetite and fading stock rally, or expected monetary stimulus from the Bank of England. Stay tuned – tomorrow we will cover today’s publication of the Bank of England’s decision undertaken at the meeting ending on 13 July.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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