The FOMC Opens the Door to a Higher Gold Price

Yesterday's FOMC statement and the subsequent news conference with Chairman Powell removed the last significant headwinds for gold. We think that a new bull market for gold is about to commence.

Essentially, Chairman Powell trashed the Fed's forward guidance of the last several years, which he had enunciated as recently as October, 2018. There is now no commitment to a forward path to "policy normalization" that has been the developing Fed narrative since ending QE in November, 2014, and its first of eight rate hikes in December, 2015. Over the past few years, this narrative has substantially strengthened the dollar and raised real interest rates, two factors that have traditionally translated into pressure on the gold price.

According to Chairman Powell, rates can go up or down and the balance sheet can expand or contract based on the economic data. We have now returned to Alan Greenspan's data-dependency.

Why this sudden and far-reaching change in direction? There can be no other rational interpretation than the Fed's fear of a stock market rout, which we got a taste of in December 2018. Powell argued yesterday that the Fed continues to believe that the U.S. economy is strong. For months now, the long end of the Treasury market has disagreed. He noted that "the case for raising rates has weakened" but provided no convincing economic data to support this claim.

Powell also stated that there is now need for "an abundant reserve" for the banking system compared to the past and that future interest rate changes would be administered by the Fed, not managed through changes in the quantity of reserves. He confirmed that the Fed had returned to use of the Fed Funds Rate as its main monetary tool.

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Name Last Change
DOW 25883.20 1.31%
S&P 500 2775.60 1.08%
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TSX-V 615.92 0.00%

Resource Commodities

Name Last Change
Gold 1329.06 0.57%
Silver 15.85 0.19%
Copper 2.80 0.000
Platinum 809.00 0.12%
Oil 55.59 2.12%
Natural Gas 2.62 1.98%
Uranium 28.70 0.17%
Zinc 1.20 0.00%

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