The Daily Market Report: Gold Weighed by Rise in Yields, Supported by Weak Dollar

USAGOLD/Peter Grant/06-29-17

Gold has retreated into the range, weighed by a rise in global yields as central banks are suddenly following the lead of the Fed and adopting more hawkish tones. U.S. yields are up as well, but the dollar index is plumbing 8-month lows and helping to limit the yellow metal’s downside.

Perhaps the ECB and BoE were starting to get worried about the widening interest rate differentials with the U.S. Certainly the realities of the data don’t warrant any more optimism about the true state of their economies than here in the U.S.

Investment expert John Mauldin has a theory about why the Fed is ignoring the data and continues to tighten monetary policy, even though we all know that “Fed tightening cycles always end with a US market crash or an emerging-market crash or both (but usually just a US market crash).”

Mauldin believes that the Fed believes the complexion of the central bank is about to change dramatically. As we discussed earlier in the year, three of the seven seats on the Board of Governors are presently vacant. President Trump can make appointments to the vacant seats whenever he is ready. There is scope that he may replace both Yellen and Fischer next year as well.

Mauldin reminds us that “the FOMC works by consensus” with the Fed chair striving “mightily” to get everyone on the same page. As such, most decisions end up being unanimous. The stability associated with that unanimity is important to the U.S. banking system, the broader global financial system and private businesses as well.

“Enter Donald Trump, for whom stability is a lesser priority.”

I believe a faction on the FOMC wants to cement its own preferred policies in place and make it difficult or impossible for a new majority to change course in 2018 or thereafter. Yellen, Fischer, and Dudley all seem to be of that mind, and they are now taking a hawkish approach to monetary policy. That’s why they don’t want to do the otherwise sensible thing, which is to wait for more evidence that inflation is a problem before tightening further, especially so late in the recovery cycle. — John Mauldin

Such political maneuvering — if that is what’s going on — is certainly outside the Fed’s mandate. Of course, to suggest that this creation of Congress is somehow immune to politics, even if it is the personal politics of its members, would be incredibly naive.

A fractious FOMC would sow the seeds of uncertainty and market instability. But even the process of trying to prevent this — of raising rates into economic weakness — is cause for concern as well.

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