Gold and The June FOMC Minutes

Overnight the minutes from the Fed’s June meeting were released. They were a disappointment for those including Patti Domm at CNBC who only hours prior to the release wrote of expecting insight into the Fed’s plan to unwind its extraordinary $4.5 trillion post-GFC balance sheet.

Reactions are still emerging online but for now, one of the more notable characteristics of the report as exhibited by the various responses available at the moment was the distinct lack of consensus within the FOMC on when exactly the Federal Reserve will taper its balance sheet. 

There is a consensus in the market and the “Fed watching” community more broadly that September will mark the commencement of balance sheet reductions with CIBC World Markets senior economist Avery Shenfeld going as far as saying that the uncertainty inherent in the minutes actually supported his call for a September taper and that “the Fed will be able to use progress in labour markets to justify another hike this year, but all the detail on the balance sheet issue suggests that the next move will be the run-off initiation rather than a hike”

According to the minutes, “several preferred to announce a start to the process within a couple of months, however, some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation.”

In fact there was no obvious agreement on expectations for inflation in the FOMC’s discussions with some members continuing to disregard weak price pressures as “transitory” while “several participants expressed concern that progress toward the Committee’s 2 percent longer-run inflation objective might have slowed and that the recent softness in inflation might persist”.

To the casual observer, all of this may seem appropriately described as directionless, ambiguous, confusing or even contradictory and the use of such terms is completely understandable. “Fed watching” has become a notable characteristic of our time with tips and odds released by analysts akin to what one would expect from discussions of a sporting event. In fact it was only Monday that we discussed the difficulty that “average investors” face when trying to discern complex financial information.

Only two hours ago for example, Jim McDonald of Northern Trust Asset Management appeared on CNBC and said of the Fed “I think the market is ready for them to start to reduce the balance sheet”. Jim Caron of MSIM Global Fixed Income is already talking about his expectations for tapering guidance by saying “I think in September they’ll probably announce something, perhaps balance sheet reduction”  and goes on to claim a 50% chance of a further rate hike this year. Notably he remarked that the Fed “is running into some problems here which is correlation risk”; a concept beyond the scope of this article but nicely summarised as by Jim as being “risks of excesses”.

Perhaps this lack of certainty within the financial community is why gold was relatively unchanged following the release of the minutes; with prices trading at a mid $1,220 handle at the time of writing and hovering at an attractive four-month low. Confusion is where mistakes can be made and gold is a good hedge against that situation.

We’ve been covering gold’s price declines of late and can only continue to affirm the tangible fundamental characteristics of the metal in the face of an unbalance and uncertain future. In fact in lieu of any pressing news release in the coming day, tomorrow we will elaborate on the different psychological approaches to investing in a depressed asset.