Questions arise about next FOMC meeting; will their decisions remain data-dependent

Exactly one week from today the Federal Reserve will hold the first Federal Open Market Committee meeting for the calendar year 2023. But before Federal Reserve officials meet for the first time this year on Friday, January 27 the government will release its latest data on inflation vis-à-vis the core PCE for December. Currently, the forecast for this week’s core PCE report is that inflationary pressures will continue to subside from 4.7% YoY in November to 4.4% in December 2022.

Inflation has been steadily subsiding as a result of the extremely aggressive monetary policy of the Federal Reserve which has been raising the benchmark “Fed funds” rate beginning in March 2022. The Federal Reserve had maintained its benchmark rate between 0 and ¼% for an extended time even though inflation in 2021 was spiraling out of control quickly approaching a 40-year high. Beginning in March the Federal Reserve raise rates by ¼%, the first-rate hike since 2018.

This was followed by a series of aggressive rate hikes that would define the second half of 2022. The Federal Reserve as they raised rates at each consecutive FOMC meeting from March to December. In May they raised rates by ½% and followed that with a series of ¾% rate hikes in June, July, September, and November. Finally, the Federal Reserve decreased the pace of hikes starting on December 2 by only raising them by ½ %. The totality of the actions by the Federal Reserve last year took the benchmark rate from between 0 and ¼% to between 4 ¼% and 4.5%.

It is widely expected that the Federal Reserve will continue its pivot by slowing the pace of rate hikes with a ¼% rate hike during the January FOMC meeting. The CME’s FedWatch tool currently is forecasting that there is a 98.1% probability that the Fed will raise rates by only ¼% and a 1.9% probability that the Fed will raise rates by ½ %. The Federal Reserve is also on record according to their most recent economic projections released in December of last year that they expect to take their benchmark rate just above 5% and not reduce that level for the entire year and possibly into the first or second quarter 0f 2024.

This raises many questions, the most important being whether or not the Federal Reserve will maintain this aggressive monetary stance in light of recent data that indicates that inflation in the US and globally has peaked and is decreasing every month. Global inflation came in at a six-month low in December but the Federal Reserve maintains that it is unlikely to reverse its hawkish bias.

Their hardline stance that they will keep rates elevated at 5% with no rate reduction in 2023 brings to question whether or not the Federal Reserve is still data dependent, and if they are will they maintain their rigid policy of no rate deductions this year regardless of what the data shows?

While declining levels of inflation allude that the hawkish monetary policy of the Fed with aggressive rate hikes is certainly behind us. The fact that the Federal Reserve is on record stating that they will slow the pace of rate hikes the question becomes; is there any point at which positive data on lower levels of inflation will cause them to backpedal on their stance of no rate reductions in 2023?

This is possibly the most important question on the minds of economists, analysts, and most importantly market participants.

By Gary Wagner

Contributing to kitco.com

Time to Buy Gold and Silver

Tim Moseley

Gold futures remain steady as investors await the PCE report and FOMC meeting

Gold futures traded marginally higher as market participants focus on next week’s FOMC meeting. As of 4:00 PM EST, the most active February contract of gold futures is up $3.80 and fixed at $1932. Silver futures traded under pressure with the most active March contract currently down $0.37 and fixed at $23.565. The dollar had little influence on precious metals pricing today with the dollar index in essence unchanged, up 0.01%, and fixed at 101.795.

Next week, the Federal Reserve will hold the first federal Open Market Committee meeting for the year where they will most likely implement the next interest rate hike. Last week, we received a series of mixed messages from different Federal Reserve officials. James Bullard, the president of the St. Louis Federal Reserve for example expressed the need for the Federal Reserve to rapidly move to their target rate of 5% or higher saying “why stall”.

Another advocate continuing to raise rates at an accelerated rate was Cleveland Fed President Loretta Mester. Last week she commented, "I just think we need to keep going, and we'll discuss at the meeting how much to do."

However, it is still highly anticipated that the Federal Reserve will continue with a slower pace of rate hikes as seen at the last FOMC meeting in December when the Fed raised rates by ¼%, the smallest interest rate hike since March of last year. Several officials of the Federal Reserve have alluded to slowing the pace of rate hikes including Gov. Christopher Waller, who said in a speech at the Council on foreign relations that he favors a ¼% rate hike at the next FOMC meeting.

This is in alignment with the CME’s FedWatch tool which is predicting a 99.1% probability that the outcome of next week’s FOMC meeting will be a rate hike of 25-BPS, and only a 0.9% probability that the Fed will enact a more aggressive stance raising rates by 50-BPS.

One of the most important reports that will occur before the FOMC meeting is the release of the US core PCE (Personal Consumption Expenditures Price Index) index on January 27. The last report came in at 4.7% for November and it is currently believed that this month’s report will show that inflation has subsided to 4.4% in December of last year.

Gary S. Wagner

For Kitco News

Time to Buy Gold and Silver

Tim Moseley

Gold price eyes $1,950 but it might have to wait until the Fed meeting before moving on to $2,000 – analysts

Gold's January rally took prices to nine-month highs Friday, with the precious metal up more than 5% since the start of the year. But industry experts are not ruling out some consolidation ahead of the Federal Reserve's February meeting.

Gold hit a nine-month high of $1,939 an ounce Friday on bullish technical momentum and safe-haven buying. At the time of writing, February Comex gold futures were at $1,925.20, flat on the day after some profit-taking.

Is gold overbought?

Analysts describe a rapid rally in gold and warn that conditions are starting to look overbought.

"It is going to be choppy. I am neutral on gold until the Fed's meeting on February 1. Major resistance is at $2,000. But I would be surprised if we move above $1,950. We are likely to consolidate here until the Fed meeting," OANDA senior market analyst Edward Moya told Kitco News.

The overall outlook on gold remains strongly bullish, with many analysts looking for the precious to eventually get to $2,000 an ounce later this year and potentially even later this quarter. It is only the short-term view that looks potentially overstretched.

"It's been a skyrocketing move higher. If selling pressure kicks in, $1,900 might not be a strong level of support," Moya noted.

Technically, gold is approaching overbought territory, noted RJO Futures senior market strategist Frank Cholly, adding that the trend higher remains strong.

"The gold market is moving higher at a ridiculous rate. It is seeing higher highs, higher lows, and higher closes. That is good. And the U.S. dollar has been trending lower. Any correction at these levels would be a buying opportunity," Cholly told Kitco News. "I expect gold to continue to trend higher. I am bullish until we see a pullback to $1,850."

The $2,000 target is still very much on the table for Cholly. "Even though we had a little trouble achieving a close at $1,950, I see a clear pathway to $2,000," he said.

Cholly explained that gold is a unique market in that higher prices make the asset more attractive. "In other markets, such as raw commodities that are supply and demand driven, you reach a point where high prices are the cure for high prices — meaning that people stop buying at a certain price target or producers increase production. For gold, the higher it goes, the more people want it. We can easily achieve $2,000 in the first half of this year, if not sooner," he added.
 

Fed expectations

The beginning of the year saw recession fears and movement in Treasuries, which was good for gold. "Year-to-date, gold is off to a good start," Moya said. "I still maintain my 2023 bullish outlook. We've seen it rally quite a bit, so there could be some weakness here."

All eyes will be on the Fed messaging come February 1, with markets pricing in a downshift to a 25-basis-point hike. This is a significant change of pace after the Fed went from hiking by 75 basis points in the fall to 50 basis points in December.

"The Fed has done enough messaging. But the labor market is a bit confusing. There has been enough weakness in the data already. They are likely to downshift to 25 basis points," said Moya. "For the Fed, a big risk is that inflation doesn't go all the way down."

The U.S. dollar moves are critical to watch in the next few weeks as markets anticipate a lower dollar as the Fed slows down rate hikes, added Cholly.
 

Data next week

There are several critical data releases next week, including the U.S. Q4 GDP and the Fed's favorite inflation measure — the core personal consumer expenditure.

Despite deteriorating manufacturing and service sector data, the fourth quarter GDP is expected to show the U.S. economy expanding 2.6% after reporting growth of 3.2% in Q3.

"Consumer spending should be an important driver given the strong performance in October, but aside from that, the growth will largely be focused on net trade and inventory building," said ING's chief international economist James Knightley. "This is not 'good' growth. Imports are falling because of the deteriorating domestic growth story, while inventories are increasing, partly because of improved supply chains but also because demand is not as strong as many businesses expected. The GDP growth figures over the next few quarters will be much weaker."

The core PCE price index is expected to slow to 4.4% on an annual basis in December from November's pace of 4.7%.

"[This] would confirm the easing trend in price pressures. There are no scheduled Federal Reserve speakers due to the proximity to the upcoming FOMC meeting and the self-imposed 'quiet period'. We expect a 25bp interest rate increase on February 1," Knightley added.

Wednesday: Bank of Canada rate decision

Thursday: U.S. GDP Q4, U.S. jobless claims, U.S. durable goods orders

Friday: U.S. PCE price index, U.S. pending home sales

By Anna Golubova

For Kitco News

Time to Buy Gold and Silver

Tim Moseley

Solid gains for gold on bullish charts, some safe-haven buying

Gold prices are solidly higher and near this week’s nine-month high in midday U.S. trading Thursday. The technical traders continue to flow to the long side of the gold market due to bullish charts. Some modest safe-haven demand may be surfacing due to worries about the U.S. government going into default on its debt. February gold was last up $13.40 at $1,920.50 and March silver was up $0.048 at $23.695.

The U.S. Treasury Department said it is poised to take defensive action to prevent a default that could do "irreparable harm" to the economy, reports said.

Global stock markets were mixed but mostly lower overnight. U.S. stock indexes are lower at midday. The U.S. stock index bulls were derailed Wednesday when U.S. retail sales data came in weaker than expected, which revived notions the U.S. economy could slip into recession in 2023. The U.S. government debt concerns are also limiting buying interest in stocks.

 The world could run out of gold by 2050 as demand grows to keep up with evolving society, says researcher

The key outside markets today see the U.S. dollar index slightly lower. Nymex crude oil futures prices are higher and trading around $81.00 a barrel. Meantime, the yield on the benchmark U.S. 10-year Treasury note is presently fetching around 3.38%percent. U.S. Treasury yields have dropped in the wake of a tamer U.S. producer price index report on Wednesday and the weaker U.S. retail sales report.

Technically, February gold futures prices hit a nine-month high Tuesday. Bulls have the solid overall near-term technical advantage. A 2.5-month-old uptrend is in place on the daily bar chart. Bulls’ next upside price objective is to produce a close above solid resistance at $1,950.00. Bears' next near-term downside price objective is pushing futures prices below solid technical support at $1,870.00. First resistance is seen at this week’s high of $1,931.80 and then at $1,950.00. First support is seen at $1,900.00 and then at $1,885.00. Wyckoff's Market Rating: 8.5

March silver futures bulls have the overall near-term technical advantage. However, they have faded recently as a four-month-old uptrend on the daily bar chart has turned into sideways trading. Silver bulls' next upside price objective is closing prices above solid technical resistance at $25.00. The next downside price objective for the bears is closing prices below solid support at $22.50. First resistance is seen at $24.00 and then at $24.50. Next support is seen at the January low of $23.26 and then at $23.00. Wyckoff's Market Rating: 6.5.

March N.Y. copper closed down 40 points at 423.05 cents today. Prices closed nearer the session high today. Prices Wednesday hit a 6.5-month high. The copper bulls have the solid overall near-term technical advantage. However, the bulls are short-term exhausted. A three-month-old uptrend is still in place on the daily bar chart. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at 450.00 cents. The next downside price objective for the bears is closing prices below solid technical support at 400.00 cents. First resistance is seen at today’s high of 426.85 cents and then at 430.00 cents. First support is seen at today’s low of 416.80 cents and then at this week’s low of 411.05 cents. Wyckoff's Market Rating: 7.5.

By Jim Wyckoff

For Kitco News

Time to Buy Gold and Silver

Tim Moseley

Strand said that he sees gold prices gaining 20% in 2023.

Along with gold, Strand expects the precious metal mining sector, which has underperformed compared to the commodity, will attract new momentum in the new year.

"Gold miners are today historically cheap relative to gold, something that will revert and overshoot in the coming secular bull market," he said. "Gold miners have a very low correlation with the broad stock market and are becoming more interesting for larger investors looking for possible/alternative return drivers and that may result in strong capital flows, which will then take equity prices higher."

Along with the AuAG ESG Gold Mining exchange-traded fund, HANetf also manages a second environmental and social governance (ESG)-focused fund: The Royal Mint Responsibly Sourced Physical Gold ETC (LSE: RMAU). Last year RMAU saw growth of 130%, bucking the global downtrend in the ETF market.

According to the survey, wealth managers see a potential premium for ESG-focused funds, with 36% of fund managers expecting a dramatic increase in transfers to gold funds with strong ESG credentials while 54% of respondents see a slight increase in switching.

By Neils Christensen

For Kitco News

Tim Moseley

Gold, silver kick off 2023 in style

After a well-earned break, we are back in action… and what a time to be covering precious metals! Gold and silver are starting the year off on the front foot, with gold ending the first full trading week of the year at a nine-month high above $1,920 an ounce and silver prices solidly back above $24 an ounce

Gold prices are actually up nearly 5% since the start of the year, and while the year has only just started, the bullish sentiment in the marketplace is almost palpable. We have only just broken above $1,900 an ounce, but some investors and analysts have already set their sights on the $2,000 target.

Some heavyweight market players are jumping on the gold bandwagon as prices have risen $300 from November's two-year lows.

In an exclusive interview with Kitco News' Michelle Makori, Nouriel Roubini, CEO of Roubini Macro Associates and Professor Emeritus at NYU Stern School of Business, said that investors will flock to gold as 10 "megathreats" threaten the global economy.

Roubini said that he sees gold prices rising to $3000 an ounce by 2028.

"Over the next few years, I would expect that gold could have high single-digits into low double-digits rates of return," said the renowned economist, also known as "Dr. Doom," in the interview. "I expect… rates of return around 10 percent per year over the next five years."

Along with Roubini, billionaire "bond king" Jeffrey Gundlach said he turned bullish on gold when prices pushed above $1,800 an ounce.

In a webcast Tuesday, the Doubleline CEO said that gold was one of his recommendations for 2023. "It's a reasonably good time to buy gold and own gold," Gundlach said.

Many investors stayed away from gold in 2022 as the Federal Reserve's aggressive monetary policy stance pushed bond yields to a 12-year high and the U.S. dollar to a 20-year high; however, analysts have said that that trend could be reversing in 2023 as the Federal Reserve is nearing the end of its tightening cycle.

Analysts have noted that U.S. bond yields are pricing in a terminal Fed Funds rate below 5%, which in turn has caused the U.S. dollar to fall to a seven-month low this week.

Many analysts have said that both bond yields and the U.S. dollar have peaked, supporting gold's rally.

But gold is more than just the sum of investment demand. Global geopolitical uncertainty continues to support the precious metal as a critical element in global currency markets.

This week, the People's Bank of China announced that it bought 30 tonnes of gold in December. This follows November's purchase of 32 tonnes of gold, the first officially-recorded purchase since September 2019.

BNP Paribas market analyst Chi Lo said in a recent report that gold will be a crucial element in China's plan to strengthen the yuan's international credibility and challenge the U.S. dollar's status as the world's reserve currency.

"Making the renminbi convertible into gold effectively turns the currency into a global investable asset for foreign renminbi owners, boosting their confidence in and demand for the Chinese currency," Lo said in his report. "A gold-backed petro-yuan does not require full renminbi convertibility to function, so it allows China to simultaneously retain control of its capital account and boost the internationalization of the renminbi."

By Neils Christensen

For Kitco News

Time to Buy Gold and Silver

Tim Moseley

Traders bid stocks, gold, and Silver higher, but is the optimism warranted?

Market participants continue to react to the bullish market sentiment created by yesterday's CPI report. Inflation came in at 6.5% year-over-year last month, which is the sixth consecutive month that inflation has diminished since the peak of 9.1% in June.

Accoring to the BLS, "The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in December on a seasonally adjusted basis, after increasing 0.1 percent in November, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 6.5 percent before seasonal adjustment."

According to the report gasoline, "was by far the largest contributor to the monthly all items decrease, more than offsetting increases in shelter indexes. The food index increased 0.3 percent over the month with the food at home index rising 0.2 percent. The energy index decreased 4.5 percent over the month as the gasoline index declined; other major energy component indexes increased over the month."

The CPI core inflation (which strips out food and energy costs) climbed 5.7% year-over-year and is an increase of 0.3% when compared to the prior month. While inflationary pressures have diminished the core CPI is still roughly triple the Federal Reserve's target rate of 2%.

That being said, the optimism caused investors to be active buyers of US equities, gold, and silver. However, they were not basing market sentiment upon recent statements by Fed. The caveat is that the Federal Reserve has on multiple occasions reinforced its unwavering resolve to keep interest rates elevated throughout 2023.

Many analysts believe that the Fed is bluffing because current rates are not sustainable for the entire year. Others believe that their vow to be transparent simply no longer exists.

US equities, gold, and silver benefited from that sentiment resulting in strong rallies in both gold and silver, as well as moderate gains in the major stock indices. The Dow gained 0.33%, the S&P 500 gained 0.40%, and the NASDAQ composite gained 0.70%.

As of 5:42 PM EST February gold futures are up $24.20 and fixed at $1923. March silver futures gained $0.41 or 1.71% and are fixed at $24.415

As I spoke about yesterday, I continue to believe that if the Fed stays the course it could lead to one of the greatest errors by the Fed in recent history. The days of the Fed being data-dependent seem only to matter when the data confirms their assumptions.

By Gary Wagner

Contributing to kitco.com

Time to Buy Gold and Silver

Tim Moseley

The Fed's use of data-dependent decisions can't be applicable only when it supports their beliefs

Considering that as recently as June we had the highest level of inflation recorded in the last 40 years today’s CPI report from December was a welcome change as inflation continues to slowly dissipate. Just six months ago overall inflation peaked at an alarming 9.1%. The historical rise in inflation was a long process after coming in at 0.329% in April and 0.118% in May 2020.

Initially, inflation was slow to rise with inflation concluding in December 2020 at 0.812. It was January 2020 that had the highest monthly level of inflation of 2.487%. Still the average level of inflation that year was 1.234%. An action by the Federal Reserve was logical in that inflation was running substantially below its 2% target.

In 2021 inflation concluded with an annual average of inflation at 4.698%. In March of that year, inflation had breached the 2% target set by the Federal Reserve by 0.62% and began to steadily climb higher with almost each following consecutive month coming in hotter than the previous month. Inflation rose past 4% in April, close to 5% in May, and finished the year at an alarming level of 7.036%.

Yet the Federal Reserve did nothing maintaining the belief that the recent jump in inflation was transitory and as such would dissipate without any influence by the Federal Reserve. It was this incorrect assumption that resulted in a level of inflation add speak that had not been witnessed in 40 years. In January 2022 levels of inflation continue to elevate higher beginning at 7.48% in January and peeking just above 9% in June. Still, the Federal Reserve continued to falsely believe that a 40-year high and inflation would dissipate on its own. One of the greatest errors by the Federal Reserve in recent history in both their forward guidance and projections that resulted in the most inappropriate action possible is to do nothing as inflation continues to spiral.

I believe that the Federal Reserve is once again creating one of the greatest errors by the Federal Reserve in recent history. It wasn’t that long ago that the Federal Reserve when asked about their forward guidance would quickly refer to their goto response: our actions will be data dependent and determine our forward guidance to shape our decisions in regards to our monetary policy.

Since June when inflationary pressures peaked at 9.1% we have seen inflationary levels have a methodically consistent and consecutive decline reducing inflation by approximately one-third. While we still have a ways to go to reach the fed’s 2% target, it is evident that the recent action of the Federal Reserve has accomplished its intent and effectively lowered inflation. However, it has been an overwhelming consensus by Federal Reserve members that they will continue to keep interest rates elevated and possibly even implement another rate hike to reach their goal of just over 5.

Will the FED make a blunder by not following the data

Will the FED make a blunder by not following the data which reveals its time to slowly reduce rates? It seems obvious to this author that the Federal Reserve did not learn anything from its incredible mistake of waiting too long to raise rates because of its false narrative that inflation was temporary, not persistent. Now they are making another tremendous mistake disregarding the data as they used to believe that the best forward guidance they can offer is to maintain elevated rates when what is needed is rate stabilization and reduction during 2023. Members of the Federal Reserve are assumed to be experts in their field and to disregard the data is a tremendous blunder in judgment.

The doctrine of being data-dependent when it fits assumptions right or wrong and abandoning that technique when they’re convinced again that they are right is a mistake. Members of the Federal Reserve should know better.

By Gary Wagner

Contributing to kitco.com

Time to Buy Gold and Silver

Tim Moseley