fed eccles building

Gold Price Soft Before FOMC

December 13th, 2016 by

Tuesday begins the two-day Federal Reserve Open Market Committee (FOMC) meeting, and gold prices are reacting with caution ahead of the central bank’s interest-rate decision tomorrow afternoon.

Federal Reserve headquarters, Eccles Building, Washington DC (photo: Federal Reserve)

Federal Reserve headquarters, Eccles Building, Washington DC (photo: Federal Reserve)

A rate hike of 25 basis points is overwhelmingly expected by the markets. While this should provide fuel for the dollar’s continued rally, higher rates are essentially already baked in to most trades, so we don’t anticipate gold prices falling much below their current lows.

Spot gold hovered around $1,160/oz during early trading on Tuesday, trending just 0.3% lower. The silver price was almost 10¢ in the red at $17.05/oz. However, both the Platinum Group Metals moved higher, with spot platinum adding about 0.4% to $940/oz and palladium price surging 1.4% to trade at $740/oz.

All Eyes on Fed

The Federal Reserve raised its key federal funds rate by 25 bp last December. It was the first rate increase in nearly a decade. Now, the central bank has left investors waiting all year for the next step toward normalizing ultra-low interest rates. Since about this summer, the Fed has consistently telegraphed that December would be the most appropriate time to tighten monetary policy.

Fed Chair Janet Yellen testifying before Congress (photo: Federal Reserve)

Fed Chair Janet Yellen testifying before Congress (photo: Federal Reserve)

With this in mind, only the failure to hike interest rates would set off much unusual activity in the markets following Wednesday afternoon’s FOMC announcement at 2 pm EST. (Fed Chair Janet Yellen will also be giving a press conference at 2:30 pm, which bolsters the chances that a hike is in the offing.) Perhaps more important to the markets will be the forward guidance provided by the committee about how it will handle monetary policy in 2017. The more the U.S. economy shows signs of improving (read: the more that stocks keep rallying), the more pressure there will be on the Fed to raise rates multiple times next year.

Oil Trade

The crude oil market continues to climb on the belief—however potentially misplaced—that OPEC countries will indeed pull off a coordinated production cut. Saudi Arabia’s energy minister, Khalid Al-Falih, told reporters that the country was committed to “substantially” cutting oil output in order to meet the collective reduction goals set out by OPEC members two weeks ago. Moreover, a group of eleven non-OPEC countries led by Russia have also entered into an agreement for cutting production by over 550,000 barrels per day. The OPEC-Russia deal projects to reduce these countries’ output by more than 750,000 barrels per day over the next six months, wiping out nearly half of the global supply surplus.

Crude prices traded at a 17-month high on these developments. Brent crude approached $56/bbl while West Texas Intermediate (WTI) was also over 1% higher above $52/bbl.

Chinese Liquidity

china-flag-shanghai

From an international perspective, there are a number of worrisome trends taking place in China’s finance markets. The yuan, Shanghai stocks, and Chinese bonds all fell in tandem this week: the currency approached an eight-year low; the Shanghai Composite index hit a six-month low; and sovereign bond yields jumped. The anxiety for China’s economy range from a possible housing bubble bursting to pressure from U.S. President-elect Trump on trade with the Asia-Pacific stalwart. There is a general feeling that liquidity could become a problem for the Chinese markets, which could pose a risk to growth projections around the globe.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.