The Fed did surprise the markets, but not with a return to the hawkish tone. Today’s comments are very dovish and change the outlook for the interest rate decisions in a great way. Instead of a few hikes this year, we should now expect none, and only one in 2020. This is a big change from the previously hawkish remarks. It hit the market as a surprise, so it virtually had to react. The strength of the reaction is where we can find the most interesting details, not in the Fed’s message itself.

You see, the change in Fed’s tone could have easily caused a $50 rally in gold. And the yellow metal is up by mere $8.50. Silver is up by only $0.14. GDX is up in a more meaningful way, but it’s still below even the most recent high. This is an extremely weak reaction to a very bullish piece of news. We have seen multiple technical signs that the big decline in the PMs is already underway and even if we hadn’t seen any of them, today’s weak reaction would be alone to indicate it. That’s simply NOT how a market should react in a bull market. That’s exactly what we would expect to see during a bear market, when the market gets a bullish surprise. A rally, but a relatively (compared to what should take place) small move that’s only temporary.

No hikes this year and only one in 2020. In light of the above decision there is now very little the Fed can reasonably do to generate another bullish response in the precious metals sector. It’s close to being out of bullets. Technically, it could start lowering the rates, launch more money-printing mechanisms (QE and similar), but given all the narration about stronger economy, rising - on average - stock market, it’s extremely unlikely in the next several months. This means that there’s very little that the Fed can do to help gold move higher. Therefore, when the decline resumes (and based on the “strength” of today’s move up it seems that it’s going to take place shortly), one shouldn’t count on any meaningful help from the Fed.

Overall, even though gold moved a bit (yes, a bit, because that’s not even a $10 rally so far and we should have seen a massive upswing given Fed’s surprisingly dovish comments), the implications of today’s session are actually bearish for gold as they show just how weak the precious metals market currently is.

As always, we’ll keep you - our subscribers - informed.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA