The Daily Market Report: Gold Retreats, But Confusion Over Fed Intentions Should Limit Downside

19-May (USAGOLD) — Gold extended lower, weighed by a firmer dollar and the recent spike in Fed rate hike expectations. The yellow metal slipped intraday to a three week low of 1242.90, which is less than 5% off the early May high of 1303.80.

Yesterday’s release of the minutes from the April FOMC meeting suggested that a June hike would be appropriate if data are consistent with GDP pickup in Q2. The Atlanta Fed’s GDPNow model is presently tracking at 2.5% for Q2. Other forecasts are not as high. While it may seems likely now that Q2 will be an improvement over the dismal Q1 print, there’s still six-weeks left in the quarter in which the data can deteriorate and undermine these expectations.

source: tradingeconomics.com

You may recall that the GDPNow model was calling for growth around 2% late in March. When the Commerce Department released the preliminary Q1 number, it was a mere 0.5%. The annualized growth rate has been trending gradually lower since Q3-14.

Investors seemed to gloss right over this sentence within the minutes:

“Several participants were concerned incoming information might not provide sufficiently clear signals by mid-June” https://t.co/o07k3AuF7j

— Pedro da Costa (@pdacosta) May 18, 2016

I would suggest that the jury is still very much out on whether the economy has improved enough to warrant another rate hike. However, the rise in market expectations of a hike certainly reduces the likelihood of unwanted market volatility if they were to pull the trigger.

Prior to the April FOMC meeting there were hints from the Fed that they would be looking to clarify their guidance. There have been periodic claims of such intent over the years, but in the past month, the Fed’s intentions have become ‘clear as mud.’

“The Fed has changed the goal posts so many times, everyone is confused. No one knows when they’re going to raise rates and no one knows what’s going to be the key thing to trigger the decision.” — T. Rowe Price Group’s Randal Jenneke

The moving of the goal posts goes all the way back to the Fed’s 6.5% unemployment target. As this level was approached in 2014, the Fed pulled it, and the goal posts have pretty much been on the move ever since.

The June FOMC meeting is also just nine-days ahead of the Brexit referendum date. They’d have to be pretty confident the citizens of the UK were going to vote in favor of staying in order to initiate a second rate hike.

There are a myriad of risks still looming over global markets. I suppose one could count a Fed rate hike among those risks: The stock market certainly seems less than enthusiastic.

Recent price movement in gold may prove to be just another temporary setback within the dominant uptrend. The lower prices have certainly resulted in higher call-volume at our offices.