Fed Gold-Futures Purge
The comments below are an edited and abridged synopsis of an article by Adam Hamilton
Gold was crushed last week following the latest FOMC decision. While the Fed didn’t taper QE or hike interest rates, its predictions of future rates proved more hawkish than expected. That ignited a US dollar rally, and speculators fled gold futures. But that selling purge leaves gold’s near-term setup way more bullish than it had been.
The latest FOMC meeting was expected to be uneventful. Traders, analysts and economists didn’t think the Fed would declare any upcoming changes to its $120 billion per month of QE bond monetizations or zero-interest-rate policy. Indeed, the FOMC’s statement was nearly identical to the prior one.
But with every other FOMC meeting, the Fed has released a supplementary document called the Summary of Economic Projections. That includes a chart known as the ‘dot plot.’ It summarizes individual Fed officials’ outlooks on federal-funds-rate levels over the next few years, and it is not particularly accurate.
Bonds, the USDX and gold didn’t react well to the most recent dot plot. Given the violence of the moves, you’d think Fed officials saw rate hikes coming later this year. But they were opining on no federal-funds-rate increases in both 2021 and 2022! It was way out in 2023, 2-plus years from now, that the previous consensus of no rate hikes shifted to two.
Futures speculators ignored this and acted as if the FOMC had declared that rate hikes were imminent. Since higher interest rates make the US dollar more attractive, the USDX jumped 0.8% higher. That was its biggest daily gain since the end of April, and that was what wreaked havoc in gold.
Up for discussion: Gold futures speculators and the dollar; the cascading gold futures selling; gold futures-driven plunges are short-lived; secular gold bulls run for a long time; comprehensive global gold investment demand data; gold futures setup looks super bullish for gold; the odds are good for gold bouncing sharply higher; and the Fed has printed trillions of dollars of new money to stave off a serious stock bear.