Last week, the FOMC released the minutes from its last meeting. What implications do they carry for the gold market?
FOMC Finally Acknowledges the Situation As Serious
Last week, the FOMC has published minutes of its meeting from April 28-29. They show that the Fed reassessed the coronavirus economic implications since the previous meeting at which the central banks did not yet grasp the full gravity of the situation. This time, they acknowledged that “the second quarter would likely see overall economic activity decline at an unprecedented rate.” Indeed, as we reported many times, the GDP will collapse, while the unemployment rate will soar to the levels not seen since the Great Depression.
Implications for Gold
The FOMC minutes reaffirms recent Powell’s interviews, speeches and testimonies that prepare investors for an unprecedented disaster in the second quarter and subdued economic activity later this year with significant downside risks. As Powell’s remarks were generally positive for the gold prices, the minutes should continue to be supportive for the yellow metal too, although the main message has been already known by investors.
However, the minutes show also two new things. First, they indicate that the FOMC members want to be more transparent regarding the future trajectory of interest rates. So, at the upcoming meeting, we could see important changes in the Fed’s forward guidance: “While participants agreed that the current stance of monetary policy remained appropriate, they noted that the Committee could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions.” Given the epidemiological – we are all epidemiologist now! – and economic situation, we expect dovish moves, which should be positive for gold prices.
Second, the minutes show the increasing support for the yield-curve control:
Several participants remarked that a program of ongoing Treasury securities purchases could be used in the future to keep longer-term yields low. A few participants also noted that the balance sheet could be used to reinforce the Committee's forward guidance regarding the path of the federal funds rate through Federal Reserve purchases of Treasury securities on a scale necessary to keep Treasury yields at short- to medium-term maturities capped at specified levels for a period of time.
As the chart below shows, the real interest rates are already below zero. If the Fed decides to cap the bond yields, they will remain at ultra-low levels.
Chart 1: Real interest rates (red line, left axis, US 10-year inflation-indexed Treasury yields) and the price of gold (yellow line, right axis, London P.M. Fix)
The elimination of the upward pressure on the interest rates would be positive for the gold prices. Gold is a non-interest bearing assets, so it benefits from low real interest rates, in particular from negative interest rates.
Thank you.
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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor
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