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Gold Rallies, Falls with Fed Policy Makers’ Remarks

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A rally in gold prices happened on Friday after Janet Yellen’s hint at a potential US rate hike in September. During the economic symposium at Jackson Hole, Wyoming, the US Federal Reserve Chair said the case for raising interest rates was gaining strength amid strong economic numbers. Gold rallied $20 an ounce with the dollar dropping against other currencies.

Janet Yellen speaking

Shortly after, however, US Federal Reserve Vice Chairman, Stanley Fischer, suggested a hike could happen as early as September if the jobs numbers continued to be positive. Fischer’s statement to CNBC sent the greenback north while gold prices fell back.

The flip-flop in prices is analogous to the Fed’s own ambiguous policy decisions and obfuscations. But the market’s reaction is just that, a reaction. The rise and fall of gold prices and futures at the whim of the Fed’s words doesn’t change the economic fact of inflation and recession. Peter Schiff explained in a podcast prior to Yellen’s speech last week:

Maybe [Yellen] will say the U.S economy is strengthening and the Fed is getting closer to meeting its objectives. And that a rate hike is possible in the near future. So what? That’s what she always says. Now she’s not going to come out and say, ‘We’re raising rates for sure. We’re moving rates in September.’ The only thing she could say is that a rate hike is still possible. That is no different than anything that she has said in the past. So, people being nervous about a possible unprecedented hawkish statement makes no sense. Even if Yellen were to say she is raising rates in September and she followed through a rate hike. So what? It’s not going to hurt gold and it’s not going to help the dollar … When are people going to figure out it doesn’t matter what the Fed does?”

In an interview with MarketWatch, John Butler, head of wealth services at Goldmoney  made a similar point about the Fed’s ineffectual actions and the case for a bullish gold market going forward:

Yellen’s speech is notable both for what it says and does not say. While she strikes a superficially ‘hawkish’ tone short term, indicating that she holds a bias to raise rather than reduce rates over the coming months, far more important is the ‘new mandate’ that she claims the Fed needs to implement what you might call ‘permanent unconventional policy.’”

Butler’s comment alludes to the “new normal” policy suggestions delivered by San Francisco Federal Reserve President John Williams this week. The danger in Williams’ approach is it uses nominal GDP growth as opposed to real GDP, an easy way to move the benchmark and artificially raising inflation. Butler explains:

“Fed has made it clear in words and action that they will allow real rates to remain negative and this, therefore, implies continued asymmetric upside for gold.”

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