The latest FOMC meeting was accompanied by Yellen’s press conference. What are the implications of her remarks for the gold market?
Let’s face it. Yellen's remarks were not only hawkish, but also more hawkish than expected, which contributed to the plunge in the gold market. Why do we think so? First of all, Yellen did little to pierce the markets’ ballooned expectations that real economic growth will accelerate under the Trump’s presidency. The recent dot plot shows that a few FOMC members decided to revise up the projections for the federal funds rate in 2017, presumably on the expectations of the more stimulative fiscal policy. Indeed, as Yellen admitted:
“Some of the participants but not all of the participants did incorporate some assumption of a change in fiscal policy into their projections.”
In other words, Yellen could have explicitly said that Trump’s policy would be harmful or irrelevant for the economy, or that there was too much optimism about it, but instead she just pointed out: “there is considerable uncertainty about how economic policies may change and what effect they will have on the economy.”
Moreover, Yellen argued that the U.S. labor market is so good that it does not need fiscal policy. She noted:
“I would judge that the degree of slack has diminished. So, I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment.”
For us, this statement sounds really hawkish and proves that the Fed is quite confident in the U.S. economy. Indeed, this is exactly what Yellen said:
“Our decision to raise rates should certainly be understood as a reflection of the confidence we have in the progress the economy has made and our judgment that that progress will continue and the economy is proven to be remarkably resilient. So it is a vote of confidence in the economy.”
These remarks explain why the gold prices fell in the aftermath of the FOMC meeting. Yesterday, they dropped below $1,130. The reason is that the yellow metal is a bet against the U.S. economy and its currency, which shines when the market confidence in the Fed and economy is low, and suffers during periods of high confidence.
The key takeaway is that Yellen’s press conference was more hawkish than expected, which is negative news for the gold market. Her remarks strengthen the message of the recent Summary of Economic Projections which forecast three, instead of September’s two, interest rate hikes in 2017. The upward recalibration of the expected federal fund rate should exert downward pressure on the shiny metal. Although the short-term outlook for gold looks bearish right now, investors should remember that the Fed had predicted 3-4 hikes for this year. Instead, it delivered only one upward move. Therefore, the U.S. central bank may again overestimate its willingness and ability to raise interest rates. If history repeats itself, the path of federal funds rate will soften, which may provide a relief for bullion at some point next year.
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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.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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