The Fed Grows Concerned—Should Gold Investors Do The Same?

The comments below are an edited and abridged synopsis of an article by Arkadiusz Sieron

The minutes from the September FOMC meeting show that the Fed is worried about the economy. Committee members noted that downside risks had become more pronounced due to increased trade conflicts, more intensified geopolitical uncertainty, and more fragile prospects for global and domestic economic growth. Moreover, they are concerned about the inverted yield curve and increased odds of recession in the near future.

The Fed Grows Concerned—Should Gold Investors Do The Same? | BullionBuzz
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Some noted that statistical models designed to gauge the probability of recession, including those based on information from the yield curve, suggested that the likelihood of a recession occurring over the medium term had increased notably in recent months.

So the Fed’s assessment of balance of risk became bleaker. The recent downturn in manufacturing can only strengthen its pessimistic stance. Plus, President Trump has just introduced travel bans on Chinese officials and trade bans on certain Chinese companies, and that doesn’t bode well for a swift, lasting and comprehensive trade disputes resolution.

While the labour market remains strong, it only confirms the dismal outlook: companies hire workers instead of investing in capital equipment because they are unsure of the future, and it is easier to fire staff than to write off investments.

Hence, the recent minutes indicate that the FOMC may cut interest rates in October (or December) for the third time this year. The macroeconomic data does not justify another cut, but the downside risks are still present while the industrial sector entered recession. This is simply what the markets want, given the high bets on the dovish move. Some FOMC members are against it, but the Fed may simply deliver a cut with a hawkish message.

This is good news for the gold market. While this is exactly what markets expect, the move would probably not significantly affect the gold price. However, it creates a conducive environment for gold prices from the fundamental point of view.

This supportive environment is a dovish shift among the US central bankers. Fed Chairman Powell said that the Fed would “soon announce measures to add to the supply of reserves over time.” So, what if investors took steps to add to their gold holdings over time?

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