Is Gold Silence Golden? / Commodities / Gold and Silver 2018

People say that speech is silver, silence is golden. Well, not always. The recent FOMC monetary policystatement is the best example. Lets’ read out today’s article and find out why.

Nothing Changes in November

On Thursday, the FOMC published the monetary policy statement from its latest meeting that took place onNovember 7-8. In linewith the expectations, the US central bank kept the federal funds rate unchanged at the target range of 2 to 2.25 percent:

In view ofrealized and expected labor market conditions and inflation, the Committeedecided to maintain the target range for the federal funds rate at 2 to 2-1/4percent.

OK,so the Fed held interestrates steady. But did the US central bank signal any shifts in its course? Notreally. The statement was barely modified relatively to September. There wereonly two material changes. The first one concerned the growth of businessinvestment, which had moderated from its rapid pace earlier this year (inSeptember, the statement said that the growth had grown strongly). Of course, goldshould welcome the slowdown in the growth of business investment, but thatmoderation is too early to panic and buy gold.

Thesecond change was personal: Mary C. Daly is a new San Francisco Fed President (theformer was John Williams, but he shifted to run the New York Fed) and she votedfor the first time in the FOMC. We do not know whether she likes gold, but goldshould like her. Daly is seen as dove more concerned about the labor market than inflation.

Is the November Statement Irrelevantfor Gold?

Does it mean, thus, that thestatement is irrelevant for the economy and gold? Well, not necessarily. Yousee, sometimes silence speaks lauder than words. In other words, at times, whatthe Fed officials did not say might be more important to what they actuallysaid. What we mean by that is the fact that the US central bank made no commenton the recent stock market turmoil (please note that it also appears to be unwavering in the faceof criticism from Trump). Not a single word. And it still sees risks to theeconomic outlook as roughly balanced. Given the rise in the stock marketvolatility since September FOMC meeting (see the chart below), lack of anymention is hawkish (but this is what we expected: the stock market turmoil will betemporary without long-term repercussions). It turns out that silence is notalways golden.

Chart 1: Gold prices (yellowline, left axis) and CBOE VIX index (green line, right axis) in 2018.

The lack of any shift intone of the policy statement suggests that there might be no ‘Powell put’ (similar to ‘Greenspan put’). The Fed will not try to protect the stock market at all costs.Instead, it will continue its policy of gradual tightening of monetary policy. Indeed, the Fed is penciling in one more hike in 2018 and three ratehikes for 2019.

Implications for Gold

This is a problem for theyellow metal. We mean , of course, the divergent path of interest rates in2019, as the market has already priced in a 76% probability that the committee will raise the federal funds rateto a range of 2.25% to 2.5% at its meeting in December 2018. But when it comesto the next year, the Fed forecasts three hikes, while the market expects onlytwo hikes. We know that the US central bank has a poor track record when itcomes to its forecasts (and impact on the economy as well), but this time itseems to be really determined to lift interest rates. Powell is not Yellen andthe Fed under Powell is not the Fed under Yellen. Precious metals investorsshould not forget about it.Thefact that the market lags behind the Fed creates the downside risk for gold.When investors adjust their expectations to reality, the bond yields may increase, while the price of the yellow metal may drop.

Thank you.

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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

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