Trump and Powell More Dovish. Will Gold Fly Away? / Commodities / Gold and Silver 2018

President Trump and President Xi Jinping agreed to haltescalation in their trade conflict. At the same time, the Fed officials becamemore cautious about the pace of future interest rate hikes. How will thesoftening of the US trade and monetary policies affect the gold market?

Trade Truceand Gold

Have you heard about the Christmas truce? It was aseries of unofficial ceasefires across the Western Front during World War Iaround Christmas Day in 1914. In that time, men from both sides emerged fromthe trenches and met in No Man’s Land to exchange gifts, take photos, singcarols and play football. Really. Wewere also moved. It shows that there might be a moment of peace even during adreadful war.

Fast forwardto Trump’s trade war with China. Of course,and luckily, it has been only a trade dispute, not a military conflict. But thepress has been reporting about “trade truce” recently. The analysts refer tothe G20 summit in Argentina held over the weekend. During the summit, there wasa meeting between Trump and Xi. Both sides agreed to hold off on new tariffs,softening the trade conflict. In particular, the US agreed not to raise tariffsfurther on January 1st, 2019, as it was planned, while China agreed to buy moreagricultural products from U.S. farmers. Moreover, the two sides decided tonegotiate over the next 90 days to resolve contentious issues.

On Monday, Trump tweeted:

My meetingin Argentina with President Xi of China was an extraordinary one. Relationswith China have taken a BIG leap forward! Very good things will happen,” Trumptweeted on Monday.

Investors also cheered the 90-day ceasefire and thestock markets went up. As a consequence,the US dollar softened, while gold shined, as one can see in the chartbelow.

Chart 1: Gold prices from November 30 to December 3,2018.

However, the truce is not the end of the trade fight.All the freshly imposed tariffs are still in place. And 90 days might be notenough to resolve all the problems. So, yes, things look better than a weekago, but the “war” is not over – and the fight might re-escalate. Hence, the recent gains in the gold marketmight be temporary. Remember Christmas truce in 1914? It was a beautifultime, but the WWI lasted four another long years.  Youhave been warned.

NovemberFOMC Minutes and Gold

Last week, the FOMC publishedthe minutes of itslatest monetary policy meetingheld in November. Again, the press focused on the dovish signals,i.e. the fact that no one, in contrast to September meeting, mentioned thepossibility that the federal funds rate could goabove the neutral level.

However, the Fed still opts for gradual tightening of themonetary policy and for the next hike as soon as this month:
Almost allparticipants reaffirmed the view that further gradual increases in the targetrange for the federal funds rate would likely be consistent with sustaining theCommittee's objectives of maximum employment and price stability.

Consistentwith their judgment that a gradual approach to policy normalization remainedappropriate, almost all participants expressed the view that another increasein the target range for the federal funds rate was likely to be warrantedfairly soon if incoming information on the labor market and inflation was in linewith or stronger than their current expectations.

It’s true that a couple of participants note that thefederal funds rate might currently be near its neutral level, but “a couple”does not mean “all”. And there is a lot of uncertainty about the neutral levelrate, which is not, after all, an observable phenomenon. Hence, the Fed wantsto put greater emphasis on the evaluation of incoming data in assessing theeconomic and policy outlook, which is understandable.

Our point is that thepress coverage about Powell’s dovish turn is exaggerated. Actually, theFOMC’s assessment of the economic outlook was little changed, and the Committeestill expects that the pace of economic growth will remain above trend. Ifeconomy expands above its potential, it means that the interest rates are belowthe neutral level and the Fed will have to raise them. Gold will have to wait for catching its breath. 

Implicationsfor Gold

We love Christmas. But do not overestimate the Magicof Christmas. Politics is and will remain brutal. Perhaps, we will see a dealbetween US and China, but it’s too early to open the champagne (and some peoplepoint to the Thucydides Trapand argue that the re-escalation is coming). Similarly, Powell softened his language (it should not be surprising, given the stockmarket correction), but he is not a Santa who will put lower interest ratesunder the Christmas tree. Actually, brace yourself for a hike in December. It might be true that next year will bebetter for gold, but the current enthusiasm seems to be a bit elevated.

Thank you.

Ifyou enjoyed the above analysis and would you like to know more about the linkbetween the U.S. economy and the gold market, we invite you to read the August MarketOverview report. If you're interested in the detailed price analysis andprice projections with targets, we invite you to sign up for our Gold & SilverTrading Alerts . If you're not ready to subscribe at this time, we inviteyou to sign up for our goldnewsletter and stay up-to-date with our latest free articles. It's freeand you can unsubscribe anytime.

Arkadiusz Sieron

Sunshine Profits‘ MarketOverview Editor

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