(Kitco News) – The Federal Reserve’s ‘hawkish hold’ was good news for gold and silver prices on balance, though it also served to push out the uncertainty surrounding inflation, interest rates and the broader market until after the summer, likely leaving the precious metals consolidating in their recent ranges for a little while longer, according to experts.
Jesse Colombo, independent precious metals analyst and founder of the BubbleBubble Report, said precious metals breathed a sigh of relief after the Fed held rates steady.
“While higher interest rate expectations typically put downward pressure on precious metals, since they do not earn a yield, they have held up quite well in spite of that,” he wrote. “This resilience suggests that a great deal of pessimism has already been priced in, and I would argue far too excessively.”
Colombo said the technicals suggest gold and silver are now set up for a potential rebound.
“Early last week, gold broke out of a triangle pattern that many bearish commentators had expected to resolve to the downside, with calls for a move well into the $3,000s,” he noted. “Instead, the opposite occurred, which I view as a clear win.”
He said the breakout remains valid, although there has not yet been much upside follow-through, and cautioned that “we are in the heart of summer, when trading volume is light and conditions are thin as much of Wall Street is in vacation mode, so there is not much ‘juice’ right now to push precious metals significantly higher, though will change as we move into September.”
Colombo said he wants to see gold push decisively above $4,100 as further confirmation of strength and the triangle breakout. “I then want to see it clear the next hurdle at $4,300 to $4,600,” he wrote. “A strong break above that zone would be a strong signal that the recent weakness has run its course.”
Meanwhile, silver’s breakout from the triangle last week also remains intact. “I am now looking for further bullish confirmation in the form of a move above the $60 to $70 resistance zone just overhead, which would allow the rebound to fully gain traction and signal that the correction is over,” he said, adding that this may require trading volumes to pick up after the summer.
Economists Christopher Hodge, John Briggs and Selin Aker of Natixis wrote that this Fed meeting was the first to include the ‘family fights’ that Warsh has been predicting, with three regional presidents dissenting in favor of a hike.
“These dissents are not a shock given previous public statements from these three suggesting that the current policy stance is not sufficient to bring inflation down to the Fed’s target of 2%,” they wrote. “Three dissents could be viewed as mildly hawkish, but these dissenters will not necessarily be driving policy and we think the cleaner signal is that all Board Governors and New York Fed President John Williams were all on board for a pause.”
They noted that apart from the line that the Committee is now “continuing its policy of ample reserves” as opposed to “reaffirming” the policy previously, the official statement was unchanged from June.
Following the hold, Natixis’ view of the market is relatively unchanged. “We felt that a hawkish hold (as exhibited by 3 dissents and Warsh’s press conference) would mostly serve to just push out market pricing for the Fed (and market uncertainty around the Fed’s reaction function) as we wait for the next CPI report, to be received on August 12th,” they wrote. “Additionally, while not our official call, it is understandable that the market leaves a September hike on the table (currently ~60% chance of a 25bp hike), given the three dissents and Warsh’s repeated comments on achieving price stability.”
The economists said the net result is that July’s uncertainty has merely been pushed out to September. “Between now and the September meeting however we will receive two more CPI prints, and obviously this also gives the FOMC more time to evaluate the past impact, and the future fate of, oil prices given the Iran War,” they wrote. “Natixis Economics sees the policy rate on extended hold given their inflation outlook.”
Marc Chandler, managing director at Bannockburn Global Forex, said the FOMC decision looked like a hawkish hold, but it seemed like the more Chair Warsh affirmed the central bank’s commitment to achieving the inflation target, the more short-term interest rates and the dollar fell.”
“Gold was already recovering from the dip below $4000 in the North American morning but surged after the FOMC decision,” he noted. “It reached a little above $4116, a new three-day high by a few cents, but could not sustain the momentum and finished slightly below the 20-day moving average (~$4072 today). It was greeted with sellers today as it tried pushing above $4100. Silver settled firmly, up almost $1, but failed to impress. It is consolidating inside yesterday’s range.”
Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, told Kitco News that Warsh is putting his own stamp on the Fed by keeping the statement short and nearly identical to the one from the June meeting, the only addition a note about the three dissentions in favor of a hike.
“He has been very clear about focusing on inflation, explicitly and implicitly, and went further than any Fed chairman in recent memory by specifically stating 2% (and not any higher) was the Fed’s inflation goal,” he noted. “This could be considered a hawkish hold because they didn’t change rates, but they continued to highlight price stability as the biggest risk and downplayed any risks to employment.”
“If the upcoming data shows that inflation is moderating – and this is likely given the high values we saw last year, which will be easier to meet or beat this year (e.g. the year-over-year comparisons become easier) – then we could see a Fed on hold for this entire year (despite 2 rate hikes which are currently priced in) and that would be bullish for the stock market into year-end,” Zaccarelli said.
