Why gold made this unexpected move
18 June 2021
On the fence? Here’s your buying opportunity
When the Fed does the unexpected
2020 was not a normal year
On the fence? Here’s your buying opportunity
Dear Investor,
Well, that’s one way to get everyone talking.
What was meant to be a routine Federal Open Committee Meeting (FOMC) for the month…ended up giving the market the jitters.
The tone of the June FOMC was tipped to cool the markets inflationary fears and water down the down the ‘taper talk’.
Instead, the Federal Reserve Bank did the opposite.
Our central banking mates didn’t calming things down, rather they acknowledged inflation may be a bigger problem than first thought. Suggesting rates might increase sooner than originally planned…and that ending monetary stimulus is a discussion the room needs to have.
All this noise caused gold to sink like a stone.
There’s a lot to unpack today. Let’s get started…
2020 was not a normal year
The big man said it himself.
In front of the media scrum Fed chair Jerome Powell told the room ‘You can view this meeting as the talking-about-talking-about tapering meeting’.
Currently the Fed is running a US$120 billion (AU$159 billion) bond buying program.
Until this week, there’d been no discussion about when this would end.
More to the point, the Fed didn’t say when the stimulus would end. Just that the time to talk about what the end looks like.
The second thing catching the market off guard, was a ‘potential’ rate hike may happen sooner than expected.
While there’s been no changes to rates, seven of the 18 members see at least two rate increases happening in the next two years. The median view is, that US cash rate would increase by 0.50% by the end of 2023.
That’s a lot of noise about rate rises when not even half the room shares the view. I’ll get to why this is important in a moment.
Because there was another comment to chew on.
The knockout punch from the Fed this week was the elephant in the room: inflation.
Rather than being dismissive of it – as they have in the past – they suggested it’s not as ‘transitory’ as they’ve been implying. Rather Powell saying it’s ‘…ra__ising the possibility that inflation could turn out to be higher and more persistent than we anticipate’.
Until recently the Fed has stuck to the script that current data inflation figures is fleeting. Not a data set worth comparing to 2020. Afterall 2020 wasn’t a normal year, why should we expect the data to be?
Turns out their money printing ghosts of past crises may be catching up to them.
These three admissions caused major US indices to dip, but gold to dive.
Why?
If the central bank admits inflation ‘might’ be a bigger problem than initially thought, shouldn’t gold have rallied?
On the fence? Here’s your buying opportunity
Traditionally a strong US dollar can be seen as bad news for gold, though this correlation doesn’t always hold up.
A rise in the US cash rate may strengthen the US dollar, however rising inflation is meant to support the gold price.
The near on US$100 (AU$133) per ounce fall in the gold price this week feels a little over done…
US dollar gold price
Daily chart
Source: Trading View
It’s a big fall over nothing concrete frankly.
I mentioned this to Nick Frappell it looked like technical selling. Nick suggested the selloff is less driven by fundamentals, and more by a bunch of option orders in the system, saying:
‘Looks as if the strong gold down move was helped along by some concentration of option strikes below the market.
‘Dealers were short those strikes and had to hedge that which meant a tide of selling. If those options are still live, then there may be some buying if spot lifts as the reverse play goes into action.’
Meaning, gold may have fallen in the short term, keen investors may be able to ‘catch the dip’ as these technical positions get shaken out.
Perhaps though, investors should be a little more concerned about what a potential rate rise from the Fed means.
The way Nick sees it, there’s a lot of debt in the world that is tied to next-to-nothing rates in the US.
If the Fed is hinting a rate rise is on the cards a year earlier than predicted, that will cause price repricing on other markets, with Nick saying:
‘A major repricing in rates would have a potentially huge impact on other markets, including Emerging market debt and potentially property, given that the global property cycle is fairly well synchronized and responsive to rates.’
The Fed’s ‘huge’ impact on markets is something Nick said on camera earlier in the week.
A mere 24 hours before the Fed shook the weak hands out of gold, Nick and I agreed that we need to pay careful attention to the language the Fed are using. Importantly, they there may be some surprising strength in the US dollar. You can hear what he said below.
As for me, I don’t mind the gold price getting dinged about, that just looks like a buying opportunity to me…
Until next time,
Shae Russell,
Group Communications Manager, for ABC Bullion