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Week Ahead: June 8

Short Description

Is the Gold Rally OVER? + FOMC Meeting What will gold do after this week’s Fed meeting? I aim to answer that and more while I preview the week ahead in financial markets.

Video Script

Hi everyone, here’s a RIDDLE for you - Some people bite into it - But it is not a carrot - It is a precious metal - That’s pure 24 karat. #Quick pause#. Go ahead and reward yourself by clicking the like button if you guessed gold!

So we’ve got the Federal Reserve meeting this week – and I’m focusing on gold because all the extra money the Fed has been pouring into the financial system has been boosting demand for hard assets – not least gold. But the gold rally has stalled in the last 6-weeks and I’ll explain very shortly, why I think this Fed meeting could be MAKE or BREAK. 

Before that there are some other big data points to be aware of this week, which I will briefly run through now. First up there’s trade and FX Reserves data out from China. Chinese exports will offer a good clue about the state of both China’s and the world’s economic recovery in May. The official OPEC meeting is scheduled for Tuesday but an earlier virtual meeting of the top producers including Saudi Arabia and Russia might make it unnecessary. We have inflation data out of the US and China before the FOMC meeting then one to watch for Sterling is UK Q1 GDP on Friday.

Now what has drawn out the gold bugs this year? In my view it has been attractive to buy gold because the Fed has been buying bonds with printed dollars and in the process driving yields – i.e. the interest rate you earn on bonds lower. A non-interest bearing asset like gold does better when rates drop. Actually by the same logic, stocks became more attractive – because the expected return on stocks will be that much greater than in bonds when bond yields fall.

I think some of the reason gold has been taking a pause recently is that in the minutes from the last meeting, the Fed said it expected the pace of Treasury bond and MBS purchases could be reduced since markets had been functioning properly recently. Added to that Fed Chair Jerome Powell told Congress last month the Fed preferred not to use negative interest rates. Given that rates are now in a range of 0 to 0.25% - it seems unlikely rates will be cut further.

So what else can the Fed change? Well I think – for this meeting – it comes down to FORWARD GUIDANCE – meaning: how will the Fed show markets what it plans next? There are two methods that could be introduced – Outcome-based and Time-based. 

Outcome means the Fed would commit to specific outcomes before tightening policy such as its inflation and unemployment targets. Time would probably be done via the Summary of Economic Projections – or SEP for short. Normally the Fed releases the SEP four times a year but it didn’t in March because of the uncertainty. The bit to watch in the SEP is the dot plot where Fed members predict short term interest rates. 

In summary, if the Fed guides that policy will remain loose until full employment and its 2% inflation target are met – or if it says rates are expected pinned to the ground for a long time – say until the year 2022 – then those in my view should be positive forces for both gold as a hard asset and riskier assets like stock markets. Otherwise if markets come away unclear about what the Fed is planning next– that could call the end of the gold rally for now.

Right thanks everyone, good luck trading and make sure to subscribe to our channel so you don’t miss the next video.