Leaning the Wrong Way?
Going into the Fed statement released as at 2 pm on Wednesday the 27th of January, it seems many gold investors were expecting the Fed to change its language on the imminence of raising short term interest rates, which the markets expect around the middle of this year. The economic news had been turning sour and markets were looking shaky. The bet was that a signal indicating a weakening of Fed resolve to raise rates would push gold higher, which it would have.
Leaning the Wrong Way?
Going into the Fed statement released as at 2 pm on Wednesday the 27th of January, it seems many gold investors were expecting the Fed to change its language on the imminence of raising short term interest rates, which the markets expect around the middle of this year. The economic news had been turning sour and markets were looking shaky. The bet was that a signal indicating a weakening of Fed resolve to raise rates would push gold higher, which it would have.
Except it did not happen. Instead, the Fed expressed stronger confidence in the economic recovery they see underway and left the rest of their language pretty much the same. Gold has since been dumped and the gold stocks too. In our view, this is a short term correction of a mildly overbought and over bullish situation. This may not be the low but we see a turn higher within a week or two. Why? Because there is now much more interest in gold and gold stocks as a result of heightened market awareness of financial system risks. More on that in a later note.
You can generally bet against the Fed changing its tune because they are usually the last to figure out that the US economy is in trouble. For confirmation, see the minutes of their 2008 meetings. As their world was sliding into crisis, they were blindly confident that all was well. Why? Because they look at their models instead of listening to markets. It likely won't be any different this time.