Gold Gains as the Fed Flops

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If such a thing as D-Day exists for commodities brokers, the Federal Reserve policy meetings must sit at the very top of the rankings.  Perhaps no other day or event in the world can do more to affect the flow of markets and prices quite like the major decisions on the dollar (decisions subsidized by our tax dollars but not subject to taxpayer oversight).  Come September, all but the entire world believed that the Federal Reserve would take steps to lower interest rates on the dollar, which would in turn keep the price of gold from growing as reserve currency splurges made metal superfluous.  Yet the policy meeting came and went without a single interest rate, pushing gold up to two-month highs in a welcome turn of events.  While gold still remains below the all-important $1200 per-ounce threshold, which many mining executives believe determines profitability or lack thereof, the push up to a peak value of $1160 brought new hope into gold bulls.  Can we expect more growth from gold in the short term?

Growth: Sort Of, But Not Really

How would you prefer to measure the growth of the US economy and the strength of the dollar?  During the first few months of 2015, you need do little more than point to the Dow Jones or the S+P 500 in order to demonstrate the revival of the greenback.  Politicians will tell you that the dollar remains strong out of one side of their mouth, and that it has taken too much of a beating out of the other side.  While the dollar hasn't faired terribly in the past six months, it hasn't had anything to write home about either.  The dollar index hasn't hit 100 since March and hasn't had a month of net gain since July.  The Federal Reserve, already an institution that's only slightly less conservative than the Vatican, decided it better to err on the side of caution and give Ben Franklin and friends plenty of time to get back on their feet.  While Janet Yellen insists to anyone that will listen that she will oversee a rate hike sometime this year, each press conference makes her sound more and more like Baghdad Bob, who told reporters that there was no US invasion of Iraq up until the mortars started falling in his press studio in Tikrit.  The target rate of .25% growth looks quite modest until you look at the interest rates offered by banks for certificates of deposit, which are struggling to break a paltry single percent.  The message is clear: everyone wants the dollar in the here and now, but not many people want the dollar for tomorrow.  That's been a boost to gold that has been sorely needed for almost two years.

Metals Mania

It is, alas, far too early to declare the bear metals market of 2014-2015 dead (but good riddance anyway).  Prices remain well below 2013 levels and the memory of the 2011 boom seems so far away that it might as well be wearing a prom dress.  Yet there's no shortage of reasons to be happy.  Look no further than the S+P GSCI Precious Metals composite index, which has seen two straight months of gains that pushed the overall price past $1400, the same value the index passed on New Year's Day on the long road down through the last nine months.  After hitting the bottom-barrel price of $1106 per ounce in August, the price of gold per ounce and the price for futures gold has risen by a full half a percent through the fall months.  Some mining companies, most notably Glencore, have decided they'd prefer to sell off assets and hoard cash rather than spend money to put a devalued product onto the market through the first half of the year.  The resurgence of precious metals is neither aggressive nor permanent, but it's nevertheless quite welcome and reason to think positively about gold.

Interest in Gold

How long can metals investors play chicken with Federal Reserve policy?  Longer than you might think.  Nataxis released an investor memo recommending gold and other precious metals on the belief that the Fed wouldn't act so long as the US economic data remains milquetoast.  The asset managers claimed that the market was "ripe", noting that the same tide that lifted the fortunes of gold also gave palladium a four-month high.  A full percent spike for silver looked good on paper but paled in comparison to a full 4.2% jump for platinum, which feels the same supply squeeze due to mine closures in central and south Africa.  With the dollar suddenly lagging against the Euro and Swiss franc, it appears that the Fed boogeyman has retreated back under the bed and given a burst of fresh air to the metals market.

  • The Takeaway: it's too short-sighted to say that the delayed Fed decision puts gold in a temporary boost.  As mining companies cut output at the same time that currency looks more and more unappealing, precious metals will receive a lot of attention from investors.  The six-month futures for gold are trading at or near their current spot price, suggesting an opportunity for investors to hitch a short-term wagon to gold and ride the upswing and uncertainty.  Buy gold for delivery in the early months of 2016 to best profit from the trend, as it's hard to project what the Fed will do after a holiday season that looked strong up until recent weeks.
  • Can the dollar engage in a turnaround?  Yes, as it always does, but probably not quickly.  Exports are slowing at the same time that the TPP deal will swing leverage towards foreign producers.  In addition to profiting from gold, investors with an interest in forex commodities can sell the dollar against the Euro or pound sterling in order to recoup some value as the cash in their pocket depreciates.

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