The Daily Market Report: Gold Remains Defensive on Rate Hike Expectation Shift

20-May (USAGOLD) — Gold is maintaining a defensive posture in the wake of midweek losses associated with the shift in Fed rate hike expectations. The dollar remains firm near 7-week highs, which is weighing on the yellow metal.

In the wake of Wednesday’s release of the minutes from the April FOMC meeting, rate hike expectations have surged to 30% for June and 55% for July. However, it leaves one wondering why the economic optimism expressed in the minutes was not conveyed in the policy statement immediately following that meeting.

My guess is that uncertainty continues to reign. As the Fed tries to walk that fine line between optimism and caution, guidance becomes completely clouded. The allows the market to latch on to specific — often contradictory — verbiage in the statement or minutes and speculate on the central banks underlying intentions. That’s no way to run monetary policy as you continue to tout transparency and clarity.

It’s on us to communicate [forward guidance] as effectively as possible, and I think we’re trying to do that. The Federal Reserve today is much more transparent than it was even seven or eight years ago in terms of statements, press conferences, testimony, interviews like this one. So I think we’re trying to communicate as clearly as possible. Unfortunately the world is uncertain, the outlook changes in relationship to a lot of developments that are hard to anticipate, and so the world is a little bit messier than what we would like it to be, but that’s the world we live in. — William Dudley, the president of the Federal Reserve Bank of New York (May 09, 2016)

If the goal truly is clarity, there’s lot’s of room for improvement. If the goal is really to keep markets off-balance and confused . . . mission accomplished.

The market will be closely watching growth and inflation data in the coming weeks, ahead of the June FOMC meeting and the end of Q2. In the data one can hope to find the clarity that the Fed can’t quite seem to get a handle on. Remember that the despite all the words surrounding it, the key phrase in all Fed communications has to do with ‘data dependence’.

While gold is poised to notch its third consecutive weekly decline, losses since the high was set early in the month have been less than 4%. That leaves the yellow metal up about 18% YTD and nearly 20% since the cycle low was hit last December. The indication being that recent losses are a reasonable correction within the dominant uptrend.