Actions speak louder than words. But the right (or wrong) words from the Fed can fuel a big reaction in gold. Just be sure to stay focused on the fact that we are in the closing stages of a four-decade-plus trend of ever-lower rates and ever-easier money, notes Brien Lundin, editor of Gold Newsletter.
I had warned last week that both gold and silver were poised just above their key 50-day moving averages, and that the “trend was not our friend.” That proved to be the case as two big sell-offs last week took the prices of both below that support line. Consider gold:
As you can see, gold fell decisively through the 50 DMA. Silver’s chart was so much worse that I’m not even showing it here. Things looked pretty dire. In fact, in the Gold Newsletter Alert I issued to subscribers last Thursday, I closed with this comment:
“It will be hard to get investors too excited about the metals until late July or early August...although Jerome Powell and his compatriots could provide a spark.”
We didn’t have to wait long for that spark, because Powell opened his mouth the very next day. Speaking at a financial conference on Friday, he said...
“We've come a long way in policy tightening and the stance of policy is restrictive and we face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stresses. Having come this far we can afford to look at the data and the evolving outlook to make careful assessments.”
One of the things I’ve been stressing to you is that the Fed doesn’t want to surprise the markets. Even what might appear to be an off-the-cuff remark is carefully planned to deliver a message. In fact, some commentators noted that Powell appeared to be reading this statement, and thus there was no chance it was random or accidental.
So, he clearly meant to telegraph that a pause is the likely outcome of the Fed’s June 14th meeting. The reaction in gold was immediate, with the price jumping about $20. We have since pulled back a bit.
So, what to make of all of this?
Firstly, that gold and other investment markets are almost entirely driven from day to day by inklings as to future Fed policy. Anything hinting at more-hawkish policy drives everything lower, and indications of potentially more-dovish moves lifts every market.
Second, ignore that first comment. Remember we are in the closing stages of a long-term trend of lower rates and easier money. No one can predict to any precise degree what lies ahead, but we can be confident that we’ll want to own gold, silver and select mining stocks going into it.
