Another meeting of the U.S. Federal Open Market Committee (FOMC) is now behind us. As readers of my columns may have anticipated, it came up with little chance of our expectations regarding future Fed policy and tapering, or interest rate rises. While the initial market reaction was to view the deliberations to be slightly, but not excessively, hawkish and thereby knock the gold price back a couple of dollars, subsequent statements by Fed chair Jerome Powell immediately reversed this trend and gold ended the day a few dollars higher at around $1,808. The dollar index came down a little and ended a little lower and the Dow and the S&P 500 also closed down a few points, although not significantly so. Today, in Europe, gold seemed to be headed towards $1,830 or higher, but will this progress survive the key American marketplace?
Bitcoin caught a bid or two, ending back above $40,000. Although it has fallen back slightly below this level since, we doubt the rise was Fed-related, but rather through somewhat we see as dubious social media promotion. We remain skeptical about the whole cryptocurrency environment as subject to some increasingly suspect promotional activity in the face of ever-rising evidence that some of the key players in this hugely lucrative market are far from transparent in either their antecedents or promotional activities.
But we digress. So what do we see as the principal take-aways from the FOMC meeting itself and its aftermath? First and foremost is the confirmation that inflation has indeed been running at higher levels than the Fed had been anticipating and would likely be with us for longer than expected before coming back down again. As Fed Chair Powell explained:
"Most of the time, when you have high inflation, you have full employment. Right now, we have high inflation but not maximum employment. This is a strong labor market.
Shouldn't take that long to get there. Inflation is running well above our 2% objective. It has been for a few months and will be in coming months before coming down to our target."
Looking ahead, Powell seemed to rule out any short-term changes to the Fed's $120 billion a month bond-buying program, nor did he suggest any alteration ahead to the Fed's interest rate plans which seem for now to rule out any increase in the Fed Funds rate until at least mid-2022 – if then.
Continuing near-zero interest rates, coupled with potentially higher and probably still rising, inflation means that real interest rates, as experienced by the American public, will remain substantially negative, which is seen as highly favorable for the gold price.
In subsequent statements, Powell went on, "We see ourselves as having some ground to cover to get there... We are not at substantial further progress. This meeting was the first deep dive on timing, pace, and composition, but no decision was made... We are making progress. And we expect that if things go well … and when we reach our goal, then we'll taper at that point... Since the committee adopted its asset purchase guidance last December, we also reviewed some considerations around how our asset purchases might be adjusted, including their pace and composition once economic conditions warrant a change. In future meetings, the committee will again assess the economy's progress toward our goals. The timing of any change in the pace of our asset purchases will depend on the incoming data. As we've said, we will provide advanced notice before making any changes to our program."
This all suggests that the Fed does not yet see itself in a position to make any changes to its ongoing policy and likely schedule but will continue to mull over the position at future meetings as the economy recovers (or not) COVID-19 pandemic. Recent trends are not promising here. With vaccination rates low across much of the country, the infection rate, driven by the more infectious Delta variant, appears to be rising, and at the current rate of increase will likely surpass the 100,000 new cases a day mark within the next week – it is already well above 80,000 new cases a day. Measures to control the increase could well see another delay to economic recovery, which, in turn, could mean Fed tapering and any interest rate rise is further into the future than markets had been anticipating.
All this has seen the gold price surging in Europe alongside the US dollar falling. Europe, too, is seeing a significant increase in COVID infection rates in France, Spain, and Italy.
However, rates do appear to have been falling in the UK, although the effects of the recent substantial easing of restrictions in that country have yet to impact the figures, which will likely reverse this apparent trend as time progresses.
There does seem to be a trend, led by the UK, to try to live with the virus as an ongoing infection, like the 'flu, and thus allow the economy to recover.
But such a policy is fraught with political controversy, as is anything where statistics indicate a danger to life.
Suppose one looks at ongoing death figures dispassionately. In that case, automobile accidents, or the 'flu, probably account for more fatalities than COVID, but this fact almost certainly falls into total disregard as far as modern-day politics is concerned! In this case, the reliance on the vaccine roll-out may favor countries with high vaccination rates as the UK.
This all means that any recovery back to something approaching normality is still a long way ahead. We are probably stuck with high(ish) inflation and negative real interest rates for some time to come – probably for far longer than most economic commentators envisage - and we are thus likely to see a slow and steady gold price advance. Barring total economic collapse – which we see as unlikely (politicians seem to have a propensity for muddling through such economic crises) - we don't see some of the enormous rises in precious metals prices so beloved of headline-seeking commentators. Stick with gold. It has a long record of protecting wealth, although not one of making massive short-term gains. Better safe than sorry.
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byLawrie Williams