As investors and gold buyers try to plan for yearend purchase of gold and potential sales, they are among a large group of analysts and traders who are trying to sort out what will happen with Fed rates at the December 15–16 committee meeting.
The Impact of Confusing and Contradictory Fed Signals
One of the growing criticisms of Chairman Yellen has little to do with whether or not there will be a rate increase. In fact, as noted below, many gold buyers are bullish on the direction of gold prices regardless of any Fed action.
However, many experienced market participants are concerned over how the Fed has handled the entire issue over the past year. As the market has shown tentative signs of improvement, most have come to accept a rate increase as inevitable. In fact, Tim Duy says, “It would seem that a December rate hike is all but certain barring some dramatic deterioration in financial conditions.”
Moreover, Duy speaks for most analysts when he notes, “Quite frankly, regardless of whether you think they should hike rates, if they don’t hike rates, the divergence between what they say and what they do would become truly untenable from a communications perspective.”
Driving this point home, an article in this week’s issue of The Week refers to the “Fed rollercoaster that has driven gold prices to a five-year low.” The key here is it not so much the fundamentals or the realities of gold pricing that are affecting the market as much as the on-again, off-again posturing by Yellen and other Fed officials.
Yet another confirmation of this perspective is reiterated by Tom Stringfellow, chief investment officer at Frost Investment Advisors: “‘Dazed and confused’ is the overriding sentiment in markets.” He goes on to say, “Wall Street is certainly starting to get ‘Fed’ up with lingering confusion and the lack of clarity on when the Fed will lift interest rates from 0% and why it hasn’t happened.”
Another observation shows just how pervasive these concerns are and how all of it has confused investors so much. “Investors are still reeling and in a state of confusion in regards to the Fed’s outlook for the economy and timeline for normalization,” says veteran market watcher Peter Kenny of Kenny’s Commentary.
Lastly, Real Money observes, “The Fed Has Completely Confused the Market.” Their concern runs deeper, stating, “It [the market] not only has no idea what the Fed intends to do but it doesn’t even know what it wants.”
What Will December’s FOMC Meeting Mean to the Price of Gold?
Gavyn Davies notes there has been some slowdown in the U.S. economy. However he notes, “Yes, but it is not yet very severe — and some of it is the result of the temporary inventory correction, and some to the rising dollar. Unless it grows worse in the next few weeks, it is unlikely to dislodge the Fed from the path it has now firmly chosen.”
It is this growing consensus that drove gold prices to a one-month low Monday as investors sold off gold on such expectations of higher interest rates from the Federal Reserve.
Balancing this attitude, however, is the view of Peter Schiff. He reminds his readers that “gold prices under both Alan Greenspan and Paul Volcker serves as proof that a rising interest rate environment isn’t automatically bearish for the yellow metal.” He goes on to state that he sees a real opportunity in the ability to buy gold for less than $1,100 an ounce, with a strong upside of more than$1,200 to $1,250 an ounce.
The bottom line is that many now feel the market has factored in a nominal rise in the Fed rate, and that the broader gold market will actually benefit from any announcement because finally it will eliminate the pervasive confusion.