Gold vs. the Fed

Mike McGlone Special Contributor to Kitco News 

Wednesday May 18, 2016 08:55

(Kitco News) - Has gold rallied too far or will the trend in Federal Reserve (Fed) tightening expectations continue towards reduction, potentially shifting back to easing? Hawkish Fed governor rhetoric has resurfaced as the stock market has recovered and some economic measures have shown improvement. This week, prior to the release of the Fed minutes from the April meeting, the 12th Fed funds futures contract has declined about 10 basis points (bps) indicating an sharp increase in Fed tightening expectations in only a few days. The indication is that the effective Fed Funds rate will average near 0.70% a year from now, compared to 0.37% currently.

At the beginning of the year, Fed Funds Futures indicated the rate to average 0.83%, a year from now. So, about a 13bps decline in Fed funds hike expectations a year from now, has been good for about a $200/oz. rally in gold in 2016 to date. US Fed tightening, while most of the rest of the world’s central banks are easing, is the primary pressure factor on the US dollar gold price. The gold market is not alone in thumbing its nose at hawkish Fed rhetoric. It has significant company in declining US Treasury bond yields and the flattening yield curve. US 10yr yields have declined from 2.27% at the end of 2015 to 1.77% currently.

Time will tell who wins, but most investors are well aware that the primary factor that would shift Fed tightening expectations towards easing is a resumption of the stock market volatility experienced earlier in the year.  So what ultimately is the primary driver of the US dollar gold price? It is likely the US stock market.