For Gold, It’s All Eyes On The Federal Reserve This Week

| July 30, 2019

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It’s the week investors have been talking about for, well, weeks now. This Wednesday, the Federal Reserve is expected to announce if they will reduce interest rates, and by how much.

The debate is pretty much over whether the Fed will reduce. The expectation is they WILL reduce rates, the question is by how much? If they really think they need to goose the economy – oops, I mean if they think inflation is too low or the trade war has hurt the economy, or whatever the excuse is – they may reduce rates by 50 basis points.  Otherwise, expect a rate reduction of 25 points, or 0.25 percent.

This may have a short-term downward effect on gold, but history shows that gold rises in periods of low-interest rates. President Trump weighed in this morning on what he’d like but Fed Chair Jerome Powell doesn’t always follow along.

Your Gold Enthusiast thinks the market has already priced in a 1/4-point reduction, and a 1/2-point change might get a big reaction in the markets.  Some analysts are already publishing what they think will happen as well.

If you think about it, the economy is firing on all cylinders, the markets just hit all-time highs, and trade war talks continue.  So it would seem early to cut interest rates, which would mostly just goose the financial sector and possibly housing anyway, not immediately put money in regular people’s pockets.  But it’s the tool they have – echoing the old line about “if your only tool is a hammer”.

Over the weekend, a Chinese official from the State Administration of Foreign Exchange (SAFE) outlined China’s reasons for recent increases in central gold buying.  His short list consisted of purely economic reasons, such as ensuring a good basis for the increased size of the Chinese economy, and a good rate of return on foreign assets held – 3.68% from 2005-2014. Not too shabby for such a pool.

He also indicated China may step up it’s rate of gold purchases for the rest of 2019, and that China’s central bank may surpass Russia’s in the amount of gold purchased in 2019.  If so, that would put a good demand floor under gold for the remainder of 2019, and all gold prices would need would be small geopolitical shocks to keep pushing upward.

Don’t celebrate yet gold bulls – but it might be time to stock up on party supplies.


The Gold Enthusiast

DISCLAIMER: No specific securities were mentioned in this article.  The author is long the gold sector via small positions in NUGT, JNUG, a few junior miners, and covered calls on part of the NUGT position. He has no plans to trade the shares in the next 72 hours. Some of the options may be rolled forward and up in that timeframe if the current sag in the gold sector continues.

Note: This article originally appeared at The Gold Enthusiast.


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About the Author ()

Mike Hammer has had a wide-ranging career, with trading and investing as a continuing theme. Mike graduated from UC Berkeley with a business degree, then worked with Macy's in their operations arm. He left Macy's and spent a summer trading his own account, which taught him a lot about trading in general and markets in particular. Trading through the Black Monday and the Crash of 1987 showed him how most people are unprepared for upheavals in their trading. He then joined Waddell & Reed as a financial advisor, helping regular people understand their finances and meet their life goals. Then came the usual story - Mike met and married the lady of his dreams. They moved to upstate New York, where Mike worked first for a small manufacturing consulting company, then Cornell University. While loving the work and the higher-education atmosphere, Mike missed the world of finance. Eventually, he signed up for stock trading coaching with the Adam Mesh Trading Group, to learn from people who understood modern markets. Within a year, Adam asked Mike to become a stock trading coach. Since then, Mike has trained over 200 individuals, spoke at several national conventions, and is a frequent contributor to conference calls across the Adam Mesh community. Mike writes The Gold Enthusiast daily newsletter, runs the Golden Hammer trading service, and participates in the Mesh Private Portfolio. He also keeps a position in international education which keep him in touch with "the student mindset". Mike closely follows the gold, energy, and financial sectors. His motto is "Plan your trade, then trade your plan!"