The Daily Market Report: Gold Consolidates as Fed Considers Balance Sheet Normalization


USAGOLD/Peter Grant/09-19-17

Gold is consolidating near its two-week low with the two-day FOMC meeting now underway. Expect trading to be relatively subdued until the Fed announces policy tomorrow at 2:00ET.

The yellow metal remains calm, despite a rather significant escalation of of the geopolitical rhetoric at the UN General Assembly this morning. “The United States has great strength and patience, but if it is forced to defend itself or its allies, we will have no choice but to totally destroy North Korea,” said President Trump. The DPRK will almost assuredly respond in some manner, further escalating an already extremely tense situation.

Jim Rickards was asked what brought gold down yesterday, he responded by tweeting, “Chatter about higher inflation, rate hikes, momentum, etc. None of it will come to pass, but it’s the flavor of the month.” Someone else asked how many rate hikes he saw for the rest of the year. “Zero” was the reply.

As the Fed ponders policy and whether to start winding-down it’s massive $4 trillion balance sheet, a Fed economist raised questions as to whether the build-up of that balance sheet via quantitative easing (QE) did any good at all.

“With respect to QE, there are good reasons to be skeptical that it works as advertised, and some economists have made a good case that QE is actually detrimental.” — St. Louis Fed economist Stephen D. Williamson

That assessment begs the question, did global central banks really need to go more than $20 trillion down the QE rabbit-hole in order to reach such a conclusion? I mean the BoJ had been at the QE game for nearly a decade, with little to show for it, before the Fed launched QE1 in late-2008. Perhaps there was a lesson to be learned there.

One thing a world awash in liquidity did accomplish was to inflate asset prices, particularly the stock market. If central banks take the monetary punch-bowl away, is that party about to end?

The ECB is apparently already having doubts about their plan to start tapering asset purchases, particularly with the euro reaching near three-year highs. Some at the central bank are in favor of keeping their options open to expand QE into 2018.

According to Reuters, “Hawks see the currency’s strength as testament to the euro zone’s strong economic growth, while doves fear it reflects weakness in the United States and Britain.” If the reality is ultimately revealed to be closer to the latter, easier Fed policy and a weaker dollar will prevail. And that should be bullish for gold.

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