LAWRIE WILLIAMS: Same old, same old. Yellen speaks, gold falls
Gold has had a decent run, after a sharp fall immediately following last month’s US Fed interest rate rise. If one looks back to last year, the gold price was volatile, particularly before and after the various Fed Open Market Committee (FOMC) meetings and it looks that this year the same may happen all over again, but this time around gold price movement up or down may be tempered by the perceptions of how the USA’s 45th President’s proposed policies may affect the economy. While the Fed may be set on three interest rate rises this year – Yellen’s San Francisco statement yesterday did nothing to suggest this wouldn’t happen – we still think they may play wait-and-see before pulling the interest rate trigger, although others, like the well-respected, but nowadays slightly alarmist commentator, Jim Rickards, thinks the Fed will move quickly and implement another 25 basis point increase as early as March.
This year’s FOMC meetings, at which interest rate decisions are usually made, are due to be held right at the end of this month (Jan 31-Feb 1) which is almost certainly too close to the President Trump inauguration (tomorrow) for any such decision to be made. The following meeting will be on March 14-15 – Rickards’ suggested date for the next rate rise – then May 2-3 and June 13-14 bring up the balance of FOMC meetings in H1 2017. We think the Fed may err on the side of caution and wait for one of these latter two meetings to raise rates for the first time in 2017 – if at all – in order to see which way the economic wind is blowing after the first few months of office of perhaps the most divisive U.S. President ever. However an early rate rise could be seen as a Fed attempt to regain credibility given its failure to match its own economic predictions in previous years.
For the record, the H2 FOMC meetings will be on July 25-26, September 19-20, October 31-November 1 and December 12-13. Expect gold price volatility around all these dates, as we saw in 2016. If the Fed does raise rates early and the U.S. economy looks stable, unemployment doesn’t rise and equity markets don’t collapse then there could be a further two, or even three, rises in H2, but the uncertainty around the Trump presidency makes this far from a sure thing.
Yellen’s statement yesterday did reiterate that in her, and presumably her colleagues’, viewpoint the U.S. economy remains on course to be able to support three small interest rate hikes this year, and more next, with a potential target of ‘normality’ of around 3% by the end of 2019. But the Fed has been notoriously bad in its predictions for the strength or otherwise of the U.S. economy over the past five years or so.
Yet Rickards, despite his prediction that the Fed will raise interest rates at the March FOMC meeting disagrees: "They will raise (rates) in March and then something will hit the wall, either the economy or the stock market or both. Then the Fed will backpedal from there, starting with a forward guidance then perhaps a rate cut later in the year," he says on his blog, and recommends holding gold and U.S. 10-year Treasurys.
If Rickards is correct in his predictions, the gold price could fly in the final three quarters of the year as the Fed misses its interest raising opportunities again. But others do see the U.S. economy, inflation and unemployment levels ticking all the boxes for the Fed’s interest rate raising plans going forward.
But so much will depend on President Trump and whether Congress will allow him to proceed with his plans to cut taxes, spend heavily on infrastructure to boost the economy and implement other fiscal stimuli and cut legislative blockages given the country’s huge debt position. If the Trump boost to the economy is thwarted – there may be a Republican majority in both houses, but there are a number of anti-Trump GOP members in Congress and coupled with probably blanket opposition from the Democrats still sore over the Trump Presidential Election victory - the Donald’s legislative path may not be an easy one.
The last day of April will see the Trump Administration’s first 100 days in office – a time when the media tends to make its first judgments of likely success or otherwise of the new President’s proposed programmes – and we believe the Fed should not take any interest rate raising decisions before then at least, although what we believe is a sensible course will not influence the FOMC in its deliberations! What will the first 100 days see? We think some of the proposed policies will have to be rolled back altogether and a number of compromises will have to be made to satisfy Congress, while the Senate may block one or more of the Presidents’ proposed cabinet members from taking office which coluld make for an adverse perception of President Trump's promises.
Gold is testing the $1,200 level on the downside today, but the enormous opposition to Trump as President, which will be highlighted by huge demonstrations in the nation’s capital, may sober the equity markets and boost gold again temporarily – but thereafter volatile markets are likely until a much clearer idea of where Trump policies are taking the nation become apparent.
Perhaps precious metals investors should take heart though from my colleague Ross Norman's price predictions for the current year - See: Sharps Pixley Forecasts Gold To Average $1310 With A High Of $1390 In 2017