The Phaserl


Waiting for the Fed

by Alasdair Macleod, Gold Money:

Change the title of Samuel Beckett’s play to substitute the Fed for Godot, and you have a fair description of the tedious market for precious metals this week.

After spiking up last Friday under the influence of bear-closing, gold and silver prices have done nothing but drift lower-to-sideways all week. That said, the market imparts a feeling of a firm undertone, with backwardations in physical markets, and an absence of selling in the futures, rather than any serious demand chasing prices.

The Fed will pronounce on Wednesday. The FOMC has all but said they will raise the Fed Funds Rate target by 0.25%, and that this increase will be the first of a gradual rising trend.

The futures market has discounted this announcement, with the Managed Money category (i.e. hedge funds) net short for only the second time. Meanwhile, swap dealers (mainly bullion banks) are actually long. Unless this extreme position normalises, which would probably see the gold price recover to over $1100, it leaves open the opportunity for an obvious trade on the bull tack.

Given this prospect is so obvious, it is reasonable to expect the gold price to rally modestly ahead of the FOMC announcement. Furthermore, there is another factor in favour of precious metals not yet on traders’ radar, and which could help explain the current scramble for dollars. This is big trouble brewing in the wider commodities world, threatening to trigger bad debt liquidation not only from producers which are now cash-flow negative, but also whole countries are now facing severe financial difficulties. The stand-out hit has been from the oil price, which this week fell by a further7½% to multi-year lows on news that OPEC members are still accelerating output.

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1 comment to Waiting for the Fed

  • Ed_B

    “The FOMC has all but said they will raise the Fed Funds Rate target by 0.25%, and that this increase will be the first of a gradual rising trend.”

    Yes, they have telegraphed that pretty strongly. The problem is, they are 6-9 months late in doing this. They are pretty much out of “wiggle room” on this issue and now is a worse time to be raising rates than was last summer or fall.

    One can only imagine the hysteria that will occur in the bond market when rates inch up even a bit… especially in the junk bond market and in the credit default swaps. There are a lot of loans out there to high-cost oil producers, especially frackers and under-sea drillers, who are going to be crushed by even a small rate rise and so will those who loaned them billions of dollars.

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