All eyes were trained on the release of the Fed Open Market Committee (FOMC) meeting minutes from earlier this month on Wednesday. The minutes are scheduled to be made public right at 2 pm EST this afternoon, as usual, and will surely be followed by sundry and varied commentary from Fed officials in the following hours.
The gold price was down modestly again overnight before bouncing back to $1,253/oz Wednesday morning. Gold lost nearly $10 per ounce toward the end of trading yesterday and has yet to make up the ground. After moving far less than gold and silver during yesterday’s session, the Platinum Group Metals once again remained largely unchanged. Spot silver was also essentially flat, up about 3¢ per ounce to $17.08/oz.
Although the timbre of “Fed Day” may conjure excitement from a group of unknowing first-graders expecting a field trip, the (almost) monthly occurrence is hardly as exciting as it sounds.
Based on futures trading, markets are placing about an 83% probability that the Fed again raises interest rates in June. The May FOMC meeting minutes released later today will be dissected and digested for subtle signals that either support or contradict the case for a June rate hike.
Indeed, the Wall Street Journal explains the importance of the Fed minutes like this:
“Investors who want a more detailed description of Fed opinions will generally read the minutes closely. However, the Fed discloses its official view at the end of each FOMC meeting with a public statement. Fed officials make numerous speeches, which freely give their views to the public at large.” [Emphasis my own.]
Ain’t that the truth? No less than three Federal Reserve Board members will be speaking this evening after the minutes are made public: Chicago Fed President Charles Evans, Minneapolis Fed President Neel Kashkari, and relative newcomer Dallas Fed President Robert Kaplan.
Even though the Fed has generally spent the past two years trying to telegraph its plan for a gradual pace of interest-rate hikes, it has tended toward caution: For two straight years the central bank has held the federal funds rate lower than its own projections. Yet now that certain corners of the economy are perhaps picking up, the Fed has followed through with two rate increases since December, bringing the fed funds target to 0.75% to 1.00%. The expectation has swung decidedly in favor of more hikes to come.
While higher interest rates would logically appear to coincide with softer gold prices, considering a high-rate environment begets rising bond yields and a stronger currency, the beginning of a rate-increase cycle has historically been beneficial to gold. The counterintuitive nature of this dynamic makes sense when you stop to think about it for a moment. Higher interest rates are a sign of an economy where inflation is picking up. The fact that the central bank raises its target is important, but it’s only a policy tool that the Fed admits responds and reacts to market conditions rather than leads them. Therefore, gold prices should be rising along with inflation as rates creep higher.
Despite the market gyrations that tend to surround changes to key interest rates in the moment, it takes months and years for higher rates to actually affect markets and the lending environment. The precious metals will only face the negative impact of those higher rates when this is the case—say, when the fed funds rate is twice as high or three times as high. (3.00% would still be a fairly low rate by historical standards.) But in the near-term, with rates starting so low and only climbing a quarter-point (25 basis points) at a time, the role of gold and silver as inflation hedges is likely to prove more relevant.
That being said, don’t be surprised by some volatility as we approach the release of the minutes. Stocks in the U.S. were already choppy early in the session.
As the Fed minutes were awaited, the big news that swayed markets on Wednesday was Moody’s decision to downgrade China’s sovereign credit rating from a pristine “A1” to “Aa3,” one peg lower. Basically, this is a nation-state’s “credit score,” and as is the case for individual institutions or people, multiple agencies rate the creditworthiness of each country around the world.
Stocks were slightly lower in Europe following the news. Although Asian markets initially reacted negatively to the rating downgrade, shares in the region actually bounced back before the end of the overnight session as investors concluded it wasn’t a particularly big blow to the prospects for the Chinese economy. Remember, the U.S. had its supposedly unimpeachable credit rating downgraded not long ago, too.
Nonetheless, the credit downgrade does indicate something troubling about China’s growing debt bubble. Moody’s is effectively saying that it is slightly less confident in how well growth in China can offset its bloated debt burden. For Wall St and other Western markets, it should also refresh concerns about how China manages the “landing” of its inevitable economic slowdown.
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.