The markets for many commodities, and especially those for gold, were watching closely for the outcome of the Fed’s policy committee meeting that started September 16. The ongoing concern over the issue of a rate rise from the Fed has seen observers on both sides placing huge bets on what actions will be taken. With a multitude of economic and political factors entering the calculations, it was difficult to predict the results of the two-day meeting.
The results of the meeting—a 9-1 vote for no rise for now (from the current .0% to .25%)—produced an immediate rise in gold prices from the recent five-year lows. The spot price of gold reached $1,131.20 per troy ounce after the announcement, indicating how heavily a suspected increase was weighing on the market.
Futures Facing Losses
The basic function of the futures markets is to provide users a way to mitigate the risk of movements in the price of a commodity or exchange rate. This is a tool that essentially fixes prices or rates in advance for the parties to a future transaction. However, the futures market is also the vehicle for gold buyers involved in speculation, and the overall consensus was gold would be cheaper in the near-term due to a rate rise. Those speculators who bet wrong are scrambling to cover their futures purchases and minimize their losses.
This is because the current trend in gold futures showed a loss over the past 3 weeks, indicating growing expectation that the Fed would finally raise the rate after an unprecedented decade-long floor of nearly zero percent. The concern was, of course that an increase in interest rates would draw away some of the current investment in gold.
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The Wait Continues
The current response is similar to the market reaction prior to (which produced a new five-year low in the pricing of gold) and after the last meeting. With the benchmark from the Fed sitting near zero, the markets are still somewhat holding their breath for what they see as a near-inevitable increase a near-term meeting of the central bank.
While the industrial consumers of gold are using this downturn to lock in lower prices, these speculators in the most recent trading were shaping the overall momentum. This activity shows a slight uptick, indicating some buyers of gold feel that the bottom has been set for now.
Indications of a Weakening Economy?
Analysts are now trying to evaluate the impact of this decision and the data used by the Fed to make it. Beyond the immediate relief there was no increase, others are wondering if this indicates concern over a weakening economy and/or concerns about a recessional dip. It also seems to include concern over “an extremely bearish view of the global economy and particularly of the effects of a slowdown in China.”
The same article in The Week also noted, “Assuming the Fed does hold, Matt Weller, senior market analyst at Forex.com, told Market Watch gold prices should continue higher in the coming days.” It appears this prediction was spot on.