Yesterday, the Federal Reserve released their most recent monetary policy statement. How can it affect the gold market?

As expected, the Fed kept interest rates unchanged at between 0.25 and 0.50 percent once again. The main reason for such a decision was terrible payrolls in May. Indeed, the Fed noticed that job gains have been disappointing recently:

“Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished.”

Moreover, the U.S. central bank eliminated the following sentence from its recent statement: “a range of recent indicators, including strong job gains, points to additional strengthening of the labor market”. It is not surprising given that the labor market has lost momentum. Therefore, the Fed wants to make sure that recent non-farm payrolls were only temporary phenomenon. If the weakness continues, we may forget about interest rate hikes this year, which is excellent news for the gold market.

Another reason for the lack of move – abstracting of course from the fact that the Fed is considering tightening when the economy is slowing down – was possible risks from Brexit (because of British referendum, we always were skeptical about hiking in June). The Fed did not mention it in its statement, but Janet Yellen pointed it out in her press conference: “Brexit...is something we discussed and I think it’s fair to say that it was one of the factors that factored into today’s decisions”.

The statement was clearly dovish, as it did not include any hint on timing of next hike. Moreover, the Fed’s move was approved unanimously – even Esther George who had dissented in earlier meetings backed decision to keep rates unchanged. It must be something bad with the current basis of the U.S. economic growth and the Fed’s faith in it if just one report can transform hawks into doves.

The bottom line is that the Fed kept its interest rates unchanged. The U.S. central bank downgraded its assessment of labor market’s strength and adopted a more dovish stance. This is positive news for the gold bulls. Indeed, the yellow metal skyrocketed after the FOMC statement, new economic projections and Yellen’s press conference (we will analyze them in the following Gold New Monitors), hitting a two-year high of $1,310 (we mean here gold futures at Comex). The more dovish stance of the Fed and fears of Brexit should support fundamentally the price of gold in the coming week.

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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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