Gold Price Whipsaws After July FOMC Minutes

New York (Aug 18)  Yesterday, the minutes of the Federal Reserve's June meeting were released. What do they say about the Fed’s stance and what do they mean for the gold market?

The release of minutes from the last FOMC meeting brought mixed responses in gold prices. Initially, there was a moderate sell-off, but the price of gold quickly rebounded. Actually, gold rose on Wednesday. It seems that the minutes were initially considered hawkish, but investors swiftly began to reckon that not much had really changed in the Fed’s stance. Indeed, the market odds of a September hike are at 15 percent, just like the day before the release. And chances of a November or December move actually decreased yesterday. Let’s dig deeper into the minutes to show why gold prices went south and suddenly shifted to the north.

The minutes might be deemed hawkish as the FOMC members pointed out that the near-term risks to the U.S. economic outlook had diminished. The crucial hawkish part is as follows:

“Regarding the near-term outlook, participants generally agreed that the prompt recovery in financial markets following the Brexit vote and the pickup in job gains in June had alleviated two key uncertainties about the outlook that they had faced at the June meeting. Brexit now appeared likely to have little effect on the U.S. economic outlook in the near term. Moreover, the employment report for June, along with other recent information that suggested that real GDP rose at a moderate rate in the second quarter, provided some reassurance that a sharp slowdown in employment and economic activity was not under way. Participants judged that the incoming information, on the whole, had lowered the downside risks to the near-term economic outlook. Most participants anticipated that economic growth would move up to a rate somewhat above its longer-run trend during the second half of 2016 and that the labor market would strengthen further.”

As labor market conditions came close to the level consistent with maximum employment, inflation was expected to reach the Committee's inflation, while the financial system had been resilient to the Brexit vote, some FOMC members judged that another increase in the federal funds rate was or would soon be warranted.

However, as we already know, the dovish views prevailed, as participants decided to wait for more data before any action:

“Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity.”

They pointed out the weakness in business investment, the possibility of slower improvement in the housing sector, still significant uncertainty to the medium- to longer-term outlook for foreign economies (generated by Brexit, non-performing loans of European banks and the economic outlook for China), and constraints on the conduct of monetary policy associated with proximity to the effective lower bound on short-term interest rates.

To sum up, although the near-term downside risks were lower, the FOMC members still were worried and wanted to wait for more data to have confidence that the economy could handle another hike. Therefore, the minutes did not offer much more that the July statement. And they gave no indication of the possible timing of the hike, signaling the lack of determination among the Fed officials to move. Indeed, if the U.S. central bank really wanted to hike rates, it could have done so in July when the near-term risks diminished. Thus, the recent minutes will not convince anyone that the Fed is going to move off its dovish stance and hike interest rates in September. In consequence, the expected path of the federal funds rate will not increase or may even flatten further, which should be positive for the gold market. However, investors should remember that a lot of things can happen between now and September. We remain skeptical, but we cannot exclude that the Fed could convince the market that a rate hike is on the table for September, especially if the August payrolls turn out to be strong. We have already heard some hawkish comments from the Fed officials. It goes without saying that such a scenario would be negative for the gold market. Conversely, a bad jobs report would shift any discussion of hikes to December, which would support the price of gold.