Gold heads into the weekend on a defensive footing, still reeling — albeit modestly so — from the Fed’s surprise hawkishness on Wednesday. I think the market is still trying to ascertain what the Fed might be seeing that nobody else seems to see. That being said, gold is only down 0.7% on the week.
In the meantime, the economic picture continues to deteriorate, quickly undermining that Fed optimism. Housing starts tumbled 5.5% in May, and permits fell 4.5%. Consumer confidence eroded in June as well.
Former Treasury Secretary Larry Summers charged yesterday that, “The Fed has been highly unrealistic in its forecasts for several years.” As a result, “The Fed is not credible with the markets at this point.”
Well, the Fed caused just enough uncertainty to give the market pause. However, the underlying uptrend in gold that has dominated this year remains intact. The yellow metal is up just over 9% YTD.
While the FOMC nudged their 2017 GDP forecast higher to 2.2% from 2.1% in March, regional Federal Reserve bank forecasts are moving in the other direction. The Atlanta Fed’s GDP Now model for Q2 moved lower to 2.9% today. That model was predicting 4% growth as recently as early-June.
The New York Fed’s NowCast revised its Q2 growth forecast to 1.86%, down from 2.25% on June 9. Their Q3 forecast was dropped to 1.54%, versus 1.8% on June 9.
What’s going to be really interesting is how growth expectations may continue to evolve if the Trump administration’s economic agenda remains mired in political uncertainty. Gold is presently trading about $20 lower than where it closed on election day. If hopes of the reflation trade continue to evaporate, gold is likely to appreciate further.
If the realities of our weak growth prospects and diminishing inflation pressures ultimately deflate the Fed optimism, to the point where the tightening cycle is paused (or even reversed), yields and the dollar will drop. When that happens, gold will finally reclaim the $1300 handle, which will then shift focus to the $1500 zone.