With December's Fed meeting behind us, the fresh economic projections look bad for the yellow metal. However, the monetary policy statement and Powell’s press conference could support gold prices.

The FOMC announced on Wednesday (Dec. 16) its newest statement on monetary policy. The Committee kept the federal funds rate unchanged and didn’t expand its quantitative easing program.

In general, the statement was little changed, however, there was one important adjustment: the US central bank offered something similar to the outcomes-based guidance. I’m referring here to the fact that the Fed wrote that it would continue to buy at least $120 billion of bonds each month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals”. Previously, the statement noted that the US central bank would buy assets to “sustain smooth market functioning and help foster accommodative financial conditions.”

In other words, the Fed now uses forward guidance not only for the federal funds rate, but also for its balance sheet. The US central bank ties its interest-rate and balance sheet policies towards its goals of reaching full employment and inflation at two percent, meaning that the Fed will not cease buying assets unless it believes that the economy has fully recovered. Wall Street can sleep well!

All this means that the December statement could be read as slightly dovish. However, it could also be a bit disappointing for the more radical doves counting on more accommodative actions. It also means that the Fed acted more hawkish than expected, which is clearly bad news for gold bulls.

December Economic Projections and Gold

On Wednesday, the FOMC issued not only the statement of its monetary policy, but also its fresh economic projections. The COVID-19-related economic crisis is now expected to be weaker than previously thought, as the GDP growth is projected to be higher this and next year, while the unemployment rate is to be lower, as the table below shows.

To be more precise, the FOMC expects that the GDP will decrease only 2.4 percent this year, while increasing 4.2 percent in 2021 and 3.2 percent in 2022, compared to a negative -3.7, positive 4 percent and positive 3 percent expected in September.

The unemployment rate is forecasted to be “only” 6.7 percent in 2020 and 5 percent in 2021, compared to 7.6 and 5.5 percent seen in September. The fact that the recovery has progressed more quickly than expected by the central banks is another piece of bad news for gold prices. The consolation for goldbugs can be the fact that overall economic activity remains well below the pre-pandemic level.

When it comes to PCE inflation, the FOMC now sees slightly higher inflation in 2021 and 2022 compared to September (1.8 and 1.9 percent versus 1.7 and 1.8 percent). However, the FOMC still projects that inflation will stay below its target until 2023, which will provide an excellent excuse for the continuation of its dovish monetary policy of lower rates for longer, thus supporting gold prices.

Indeed, despite the more upbeat economic outlook – which is bad news for gold prices, when analyzed separately – the Fed sees that interest rates will remain unchanged, i.e., near zero, at least until the end of 2023 (however, one more Committee member thinks that hiking interest rates in 2023 is appropriate). From the fundamental point of view, this is the only positive news for gold, which shines under ZIRP and negative real interest rates.

Implications for Gold

What does December’s FOMC meeting imply for gold? Well, the price of the yellow metal declined initially, only to rebound later during Powel’s press conference. This is because the Fed Chair sounded dovish and emphasized that the US central bank would continue buying assets until “the job is well and truly done.”

Moreover, Powell promised that that Fed would say well in advance before starting to slow down the pace of bonds purchases – and that we are far away from this moment – to avoid the replay of the 2013 taper tantrum.

Summing up, the fresh dot chart offers a more optimistic economic outlook, which is bad for gold. The statement could disappoint some doves, but it can also be interpreted as quite dovish, as the Fed basically promised to increase asset purchases if economic recovery slows. Powell’s press conference reaffirms this interpretation, as the Fed Chair sounded dovish. All this means that although the Fed didn’t follow in the ECB’s footsteps, it remains highly accommodative. Such a monetary policy should keep the downward pressure on the real interest rates, thereby supporting gold prices. Actually, in recent years, the price of gold usually started to rise after the FOMC December meeting – but we have yet to see whether this pattern will replay again.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

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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 Gold & Silver Trading Alerts.

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The European Central Bank (ECB) expanded its accommodative stance. The Fed could follow suit, supporting the gold prices.

The Governing Council of the ECB met last week, announcing significant, dovish changes to its monetary policy. First of all, the ECB decided to increase the envelope of the pandemic emergency purchase program (PEPP) by €500 billion to a total of €1,850 billion. It also extended the horizon for net purchases under the PEPP to at least the end of March 2022.

Second, the ECB decided to extend the reinvestment of principal payments from maturing securities purchased under the PEPP until at least the end of 2023. Third, the ECB eased the conditions of the third series of targeted longer-term refinancing operations (e.g., through extension of the period over which considerably more favorable terms will apply by twelve months, to June 2022, and through granting more subsidized loans to banks to stimulate lending). Fourth, the ECB extended the duration of the set of collateral easing measures adopted in April. Fifth, the central bank decided to offer four additional pandemic emergency longer-term refinancing operations (PELTROs) in 2021. Sixth, the Eurosystem repo facility for central banks (EUREP) and all temporary swap and repo lines with non-euro area central banks will be extended until March 2022. Seventh, net purchases under the asset purchase program (APP) will continue at a monthly pace of €20 billion, while the interest rates will remain unchanged.

Whoa, what an impressive list of “recalibrations” of the ECB monetary policy instruments! Why did the central bank implement them? Well, the reason is the second wave of the pandemic. As I pointed out in several previous reports, although the prospects of the rollout of the vaccines are encouraging, the pandemic continues to pose serious risks to the public health, negatively affecting the economy. The ECB seems to agree with me:

The resurgence in COVID-19 cases and the associated containment measures are significantly restricting euro area economic activity, which is expected to have contracted in the fourth quarter of 2020. While activity in the manufacturing sector continues to hold up well, services activity is being severely curbed by the increase in infection rates and the new restrictions on social interaction and mobility. Inflation remains very low in the context of weak demand and significant slack in labour and product markets. Overall, the incoming data and our staff projections suggest a more pronounced near-term impact of the pandemic on the economy and a more protracted weakness in inflation than previously envisaged.

So, the second wave of the epidemic dragged down economic activity, prompting the EBC to further ease its monetary policy stance. Although the ECB is officially concerned about weak GDP growth and low inflation, its main goal is to keep bond yields exceptionally low. Or as ECB President, Christine Lagarde, told a press conference: to preserve favorable financing conditions over the epidemic, to “build that bridge across the pandemic until we have reached herd immunity so that the economic recovery is well-advanced, self-sustained and inflation is back at its pre-pandemic path.”

What does the ECB’s easing of its monetary policy imply for gold? Well, so far, gold prices were little changed in the immediate aftermath of the ECB meeting on Thursday (December 10), as one can see in the chart below.

When it comes to the more distant future, the ECB’s actions will put downward pressure on the bond yields, supporting gold prices. Many yields on European Treasuries are already near their lowest levels on record. The central bank promised to keep financing costs low, de facto using the yield curve control, only without the formal target.

On the other hand, the easing of the ECB’s monetary policy and lower European interest rates should weaken the euro against the US dollar, exerting downward pressure on gold prices.

However, investors shouldn’t forget that the FOMC will announce its own decision on the stance of the American monetary policy. Given the U.S. resurgence in COVID-19 cases and a weakening economy in the fourth quarter, the Fed is likely to become even more dovish, providing the needed support for the yellow metal.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

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 Gold & Silver Trading Alerts.

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Brace yourselves, winter is coming! It may be a harsh period for the United States, but much better for gold.

Some of you may have seen snow this year already, but the astronomical winter is still ahead of us. Unfortunately, it could be a really dark winter. Instead of joyful snowball battles and making snowmen, we will have to contend with the coronavirus. The vaccines will definitely help (the first doses of Pfizer’s vaccine were administered this week), but their widespread distribution will begin only next year. So, we still have to deal with the pandemic taking its toll here and now – as the chart below shows, the number of daily COVID-19 cases is still above 200,000 in the U.S.

The increasing cases are one thing, but the soaring numbers of COVID-19-related hospitalizations is another, even more terrifying, issue. As one can see in the chart below, the number of patients in U.S. hospitals has reached a record of 100,000, due to a surge in the aftermath of Thanksgiving.

Importantly, the situation may get even worse, as people spend more time indoors in winter, and large family gatherings during Christmas and Hanukkah are still ahead us…

I know that you are fed up with the date about the epidemic. And I don’t write about the pandemic because I’ve become an epidemiologist or want to scary you; for that all you need to do is read the press headlines or watch TV for a while. I cover the pandemic because it still impacts the global economy, and in particular, it explains why the U.S. economic growth is slowing down.

You see, in the summer and autumn of 2020, America’s economy roared back. But that might be a song of the past. As I wrote in Tuesday’s (Dec 8) edition of the Fundamental Gold Report, November’s employment situation report was disappointingly weak, and the high frequency data also point to a slowdown. For example, the number of diners and restaurants, as well as hotel and airline bookings, have declined in recent weeks.

So, the increased spread of the coronavirus slows the economy down. A growing share of Americans, even those who were previously skeptical about the epidemiological dangers, worry about catching the virus, thereby reducing their social activity.

However, there are also other factors behind the most recent economic slowdown. First, the previous recovery was caused by a low base and the end of the Great Lockdown. The deep economic crisis seen in the spring, with accompanying coronavirus restrictions, will not happen again. Therefore, the initial recovery was fast, but the pace of economic growth had to slow down. Second, the easy fiscal policy helped to increase the GDP, but Congress has so far failed to agree on another stimulus package.

Implications for Gold

What does it all mean for the yellow metal? Well, the economy could rise again when the vaccines become widely available. However, we will face a harsh winter first. It means that the coming weeks might be positive for gold – especially considering that in recent years, the shiny metal rallied in January (or sometimes even in the second half of December).

But what’s next for gold prices? Will they plunge in 2021 after the rollout of the vaccines? Well, the vaccines are in a sense, a real game changer for the world next year. As they revived the risk appetite, they hit the safe-haven demand for gold. So, yes, there is a downward risk, although it could already be priced in.

However, the vaccines are a game changer only in a sense. You see, the vaccines might protect us from the virus, but they will not solve all our economic problems, therefore, caution is still required. On Monday (Dec 7), the Bank of International Settlements warned the public that “we are moving from the liquidity to the solvency phase of the crisis”.

Actually, the post-winter, post-pandemic environment might be beneficial for gold. You see, gold is a portfolio-diversifier which serves as a safe haven asset during a period of turmoil, but it performs the best during the very early phase of an economic recovery – especially as the central banks will continue the policy of zero interest rates. Thus, the new stimulus package, low real interest rates, worries about the U.S. dollar strength and debt sustainability, and fears of inflation, which will accompany the economic revival in 2021, should support gold prices.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

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 Gold & Silver Trading Alerts.

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US nonfarm payrolls disappointed in November. What does it mean for gold?

First, let’s examine the facts. As the chart below shows, total nonfarm payrolls in November 2020, rose by just 245,000, following much larger gains of 711,000 in October. What is important here is that the US economy added significantly fewer jobs than expected – economists surveyed by Bloomberg forecasted 466,000 additions. Moreover, the civilian labor force participation rate decreased from 61.7 in October to 61.5 in November.

On the positive side, the unemployment rate edged down from 6.9 to 6.7 percent, as the chart above shows. Although the rate is down by 8.0 percentage points from April’s high of 14.7 percent, it’s still 3.2 percentage points higher than it was before the pandemic started. And the nonfarm employment in November was below its February level by 9.8 million, or 6.5 percent, so there is still a long way ahead to a full recovery in the labor market. Actually, the weakening rate of improvement is a signal that the labor market will struggle during the winter wave of the epidemic. As the chart below shows, the daily new cases of COVID-19 in the U.S. are still above 200,000.

You see, at such high levels of infection, the labor market’s rebound will slow down further in December. Many people are not looking for a job because of the coronavirus, and strengthened lockdown measures have limited the ability to find a job for those who don’t fear the pathogen.

Although there might not be a double-dip recession, a lot of time will pass before the economy will fully recover. As the chart below shows, the initial claims have stayed at an elevated level of 700,000-800,000 (more than three times higher than just before the pandemic) since October.

Implications for Gold

What does it all mean for the yellow metal? Well, gold’s initial reaction to a weak employment situation report was rather modest. As the chart below shows, the price of the shiny metal increased from $1,832 to $1,843 on Friday (December 4). However, the weak economy should support gold prices.

Moreover, the slowdown in the labor market increases the odds for the fiscal stimulus deal. Indeed, Congress should feel more pressure to act in providing the new package, especially considering that at the end of the year, a few unemployment benefit programs will expire, thereby aggravating the income situation of many Americans. The fresh fiscal aid can be agreed upon by the current White House and Congress, but even if not – don’t worry, dovish Janet Yellen, nominated as Treasury Secretary, is ready to act generously and to promote a strong fiscal response.

The disappointing nonfarm payrolls can also prompt the Fed to further strengthen its accommodative stance in the coming months to sail the US economy through the pandemic storm until the vaccines will come to the rescue.

The increased chances of more cheap money from the US central bank and Treasury should support the price of the yellow metal. They boosted the equities on Friday, that’s for sure. It seems that we are observing the return of “the worse, the better” in the financial markets. According to this logic, bad news is positive for Wall Street, as it increases the odds of more liquidity coming into the markets. Therefore, there is a risk that the improved risk sentiment will create downward pressure on the price of gold.

However, gold could also benefit from additional aid in the long run, as monetary and fiscal stimuli would add to both the Fed’s balance sheet and the fiscal deficits. Increased money supply and the public debt should benefit the shiny metal, as a more dovish central bank and Treasury imply lower real interest rates for longer, with a higher risk of inflation and debt crisis.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

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 Gold & Silver Trading Alerts.

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The price of gold returned to above $1,800. Is the correction over?

As the chart below shows, the price of gold rebounded, jumping from $1,763 to $1,811 on Tuesday (December 1) and increased further on Wednesday. As a reminder, the price of gold corrected more than 6 percent in November and almost 15 percent from its peak in August. Now, the key question is whether the worst is behind the gold bulls.

Well, it’s too early to declare it with certainty, but it’s possible. Or we are very close to the bottom – at least, if history is any guide. After all, in the past few years, gold used to reach the local bottom either in November or December. So, recently, there has been seasonal weakness between September and December in the gold market, with November being a tough period for the yellow metal.

Hence, the hopes about revival in the gold market could be justified. After all, the price of gold has been in a correction for about four months now. And the recent news about the vaccines – I refer here to the fact that yesterday (December 2), the UK approved the Pfizer-BioNTech vaccine for use as the first country in the world and said that it will be rolled beginning next week – have not sent gold prices down. So, it could be the case that the endgame for the pandemic has already been priced into the price of gold.

Of course, gold can decline even further in the short-term. Wild fluctuations are possible on a daily basis. However, the fundamental outlook remains positive for the precious metal, no matter what the case is with gold’s technical performance. You see, regardless of when the vaccines against the coronavirus are distributed around the world and when the pandemic comes to an ultimate end, the global economy will not recover anytime soon. Actually, we are likely to stay under the “new normal”.

Implications for Gold Under a New Normal

What do I mean by the “new normal”? First of all, interest rates will stay low for longer. We will fall into the debt trap, so the Fed’s ultra-easy monetary policy is not likely to be normalized anytime soon. Indeed, as Powell has recently said in his testimony to Congress,

The rise in new COVID-19 cases, both here and abroad, is concerning and could prove challenging for the next few months. A full economic recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities. Recent news on the vaccine front is very positive for the medium term. For now, significant challenges and uncertainties remain, including timing, production and distribution, and efficacy across different groups. It remains difficult to assess the timing and scope of the economic implications of these developments with any degree of confidence.

In consequence, the real interest rates should stay near zero for years. Actually, if inflation accelerates – and this risk has increased after the pandemic – the real rates can decline even further. The ultra-low bond yields will decrease the opportunity costs of holding the precious metals, thus increasing the demand for gold.

Oh, by the way, the public debt is going to expand. The fiscal packages should be finally delivered by US policymakers, which will add to the ballooning indebtedness, exerting downward pressure both on the interest rates and the US dollar. You see, the greenback may still be the prettiest amongt the ugly fiat currency sisters, but its charm has recently been diminished because of the Fed’s interest rate cuts and spikes in America’s fiscal deficits. It seems to be positive news for gold, the ultimate safe haven asset, in the long-run.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

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 Gold & Silver Trading Alerts.

• Read more