The Daily Market Report: Gold Retreats on Dollar Strength, But Risks Remain Considerable

15-Jul (USAGOLD) — Gold slipped to a four-month low in New York trading as Fed chair Yellen reiterated before Congress that a rate hike this year remains appropriate, if the economy evolves in-line with their historically terrible forecasts. While she didn’t say anything new, the dollar firmed, pushing the yellow metal lower.

Key in her testimony however were her continued use of caveats (emphasis is mine):

If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target . . .

. . . But let me emphasize again that these are projections based on the anticipated path of the economy, not statements of intent to raise rates at any particular time.

The Fed has proven time and time again as being notoriously inept when it comes to economic forecasting. They have consistently overestimated he strength of the recovery, so I suspect that by the time year-end rolls around, the economy will have failed yet again to meet the Fed’s objectives and there will be no rate hike.

The Bank of Canada had their hand forced already; announcing today a 25 bps rate cut. They cut their Q2 GDP forecast from +1.8% to -0.5%. Talk about being off the mark! Clearly the BoC is no better than the Fed when it comes to forecasting.

Along with today’s easing, BoC governor Poloz said, “Quantitative easing (QE) is among the BoC’s tools.” The loonie plunged to 6-year lows, offering further support to the dollar.

Meanwhile, Greek PM Tsipras is trying to cobble together support in Parliament for the onerous bailout deal. He will obviously be reliant on the pro-euro opposition parties as support in his own Syriza party is tepid to say the least:

More than half of the party’s 201-member central committee, signed a statement rejecting the “humiliating” terms of the bailout, saying it was not compatible with the principles of the left. “This proposal cannot be accepted by the people of Syriza,” they said. – from Reuters

Passage of the deal is no ‘sure-thing.’ If it does pass, it may come at the expense of Syriza’s ruling coalition. If snap elections are forced and Tspiras is ousted, the troika will surely try to force the new government into abiding by the terms of deal. But just like when Syriza came to power in December, there are certainly no assurances that they will.

The likelihood of a Fed rate hike this year I contend is negligible. The tail-risk associated with Greece remains substantial. That makes gold very undervalued at these levels.