Gold
powered higher this week right through a surprisingly-hawkish FOMC
meeting, a bullish omen. The FOMC statement had big changes arguing
for higher rates for longer. Then the Fed chair himself poured cold
water on traders’ high expectations for an initial rate cut at the
FOMC’s next meeting in mid-March. Yet despite major market
reactions to that, gold not only weathered that hawkishness but
rallied anyway.
For
the past couple years or so, gold price action has been dominated by
gold-futures speculators trying to game the Fed. They closely watch
the US dollar’s fortunes,
then do the
opposite with super-leveraged gold futures. So Federal Open
Market Committee decisions, top Fed officials’ speeches and their
future rate projections, and major economic data affecting those has
spawned big-and-heavy gold-moving trading.
This
week’s impressive gold strength despite a hawkish FOMC is a
fascinating plot twist in this saga’s latest thread. Like all good
stories, some context makes this week’s gold action much more
interesting. Leading into the previous FOMC meeting in
mid-December, futures-implied rate-cut odds were muted. Traders
figured there was about a 40% chance a new cutting cycle would be
born at the March FOMC meeting.
And
they expected about 110 basis points of total rate cuts in 2024, or
a little over four at 25bp each. Gold was trading at $1,980 on FOMC
eve, and the benchmark US Dollar Index that fuels much gold-futures
trading ran 103.8. But the FOMC really pivoted dovish that
day with a trifecta of surprises, from the FOMC statement to Fed
officials’ rate projections to the Fed chair at his post-meeting
press conference.
That
statement added a qualifier making further rate hikes sound less
likely, top Fed officials cut their year-end-2024 federal-funds-rate
outlook by 50bp in the dot plot, and Jerome Powell said rate-cut
timing had been discussed at that day’s FOMC meeting! From that
presser, the Wall Street Journal’s widely-followed Fed whisperer
tweeted “The Powell pivot begins.” Markets reacted violently to
that dovish shift.
That
day gold blasted 2.3% higher to $2,024, while the USDX plunged 0.9%
both that day and the next to hit 102.0. Rate-cut odds soared,
with March’s chances shooting over 75% and traders expecting 150bp
of cuts this year! Over the subsequent couple weeks or so, those
FOMC-induced trends continued. Gold surged up to a new
nominal record
high of $2,077, while the USDX plunged to a 5.3-month low of
100.9.
Those March rate-cut odds topped out near 90% in late December,
while futures-implied rate cuts in 2024 soared to 170bp in
mid-January! The latter was particularly grating to top Fed
officials, as they had only forecast 75bp of cuts in their
mid-December dot plot. So those guys fought back, unleashing a
united phalanx of hawkish Fedspeak. That certainly had an impact on
rate expectations, the US dollar, and gold.
At
worst gold pulled back 3.4% in mid-January,
which was really
mild considering that hawkish onslaught. The USDX crested a few
trading days later surging 2.6% in a little over several weeks,
looking like a bear-market rally. And leading into this week, March
rate-cut odds drooped back to 36% with traders looking for 132bp of
total cuts in 2024. But those five-plus 25bp cuts were still much
bigger than Fed officials’ three.
So
trying to reset traders’ rate expectations, the FOMC came in
guns-blazing this week. As this was one of the every-other meetings
without a dot plot, they couldn’t push back on that front. They
likely wouldn’t have reduced their 75bp of expected hikes in 2024
anyway, as their speeches since mid-December have continued
supporting that. Without dots, they added a hawkish
higher-rates-for-longer passage in their statement.
It
declared, “In considering any adjustments to the target range for
the federal funds rate, the Committee will carefully assess incoming
data, the evolving outlook, and the balance of risks. The Committee
does not expect it will be appropriate to reduce the target range
until it has gained greater confidence that inflation is moving
sustainably toward 2 percent.” That still looks some ways off per
recent inflation data.
The
latest CPI and PCE headline inflation reads showed US prices still
climbing 3.4% and 2.6% year-over-year. Their core variants
excluding food and energy that Fed guys are more interested in were
running +3.9% and +2.9% YoY. Economists warn reducing inflation
gets harder the lower it goes, so it is far more difficult to
drop from 3% to 2% than 6% to 5%. So regaining the FOMC’s 2% target
won’t be easy.
Then
the Fed chair doubled down in his usual post-FOMC-meeting presser.
His prepared remarks first confirmed the FOMC still plans to launch
a new cutting cycle later this year as Fed officials expected. “We
believe that our policy rate is likely at its peak for this
tightening cycle and that, if the economy evolves broadly as
expected, it will likely be appropriate to begin dialing back policy
restraint at some point this year.”
Yet
right after that he warned, “But the economy has surprised
forecasters in many ways since the pandemic, and ongoing progress
toward our 2 percent inflation objective is not assured. The
economic outlook is uncertain, and we remain highly attentive to
inflation risks. We are prepared to maintain the current target
range for the federal funds rate for longer, if appropriate.”
Powell then added a new confidence theme.
“The
Committee does not expect it will be appropriate to reduce the
target range until it has gained greater confidence that inflation
is moving sustainably toward 2 percent. We will continue to make
our decisions meeting by meeting.” Later in response to reporters’
questions, he said the FOMC needs to see more disinflation progress
to gain the confidence necessary to start cutting. But a bigger
bombshell came!
The
Fed Chair has emphasized for years that FOMC decisions are made one
meeting at a time based on economic data. So he has been loath to
telegraph any potential actions at future FOMC meetings. Yet this
Wednesday, Jerome Powell surprised saying “Based on the meeting
today, I would tell you that I don’t think it’s likely that the
committee will reach a level of confidence by the time of the March
meeting.”
Since Powell’s pressers can really move markets, I watch all of them
live in my line of work. Hearing him all but rule out a March
rate cut was stunning! All that was pretty-darned hawkish,
hammering March rate-cut odds to 38% and leaving 2024 expected cuts
near 141bp. Emphasizing how serious a hawkish surprise that was,
the flagship S&P 500 stock index plunged 1.6% into close on the Fed
chair’s comments!
That
easily could’ve lit a fire under the US dollar and crushed gold.
While the latter did fall from $2,045 just before Wednesday’s FOMC
decision to $2,037 on close, that still made for a slight 0.1% gain
across a quite-hawkish FOMC! And the US Dollar Index only climbed
0.2% to 103.6, merely revisiting its bounce high hit over a week
earlier. Gold had resisted the Fed chair despite being mired
in bearish psychology!
Post-FOMC market reactions often aren’t fully apparent until the end
of the subsequent trading day. That gives overseas traders time to
react overnight, and American traders more time to digest the
implications of whatever the Fed did. At noon Thursday as I pen
this essay, gold had surged 1.1% near $2,060. And the USDX had
dropped 0.5% around 103.1. Neither were responding as usual to a
hawkish Fed surprise!
Why? After bouncing hard out of really-oversold levels in late
December, the US Dollar Index quickly grew overbought by
mid-January. That dollar surge stalled out at the USDX’s 200-day
moving average over two weeks before the FOMC. 200dmas often
prove major overhead resistance in bear-market rallies, and the US
dollar is almost certainly in a bear. So the USDX rally was running
out of steam before Powell.
And
while trying to squash any expectations for a March rate cut was
hawkish, the Fed chair had plenty dovish to say. He declared the
FOMC indeed does plan to start cutting later this year, but it needs
to see more disinflation first. He said the Fed doesn’t require
faster declines in inflation, merely continued progress back towards
that 2% target. Powell said more inflation reports trending that
way would build confidence.
The
USDX not spiking certainly helped gold stay resilient, as
gold-futures speculators weren’t scared into dumping more contracts
in the FOMC’s wake. And as I explained well before the Fed in my
essay last week on
gold’s mild
pullback, spec gold-futures positioning was already very
bullish for gold leading into the FOMC. This chart updates that
analysis with another weekly Commitments of Traders report’s latest
data.
While not released until late Friday afternoons, CoT reports are
current to Tuesday closes. So the latest
spec-gold-futures-positioning data before this essay was published
was as of January 23rd. That day gold closed near $2,028 after
recovering from its mild-pullback low. In the next
still-not-yet-reported CoT week ending FOMC eve, gold merely climbed
0.4% to $2,036. So speculators’ bets likely didn’t change much.
Gold
has been powering higher in a young upleg, already rallying 14.2% at
best over 2.7 months into late December. With two new nominal
record closes already, this upleg has high potential to grow into a
major one. In recent years gold has seen
massive 26% to
43% gains in those! Major gold uplegs are fueled by three
sequential progressively-larger stages of buying. Specs’
gold-futures trading drives the first two.
Gold
uplegs’ initial surges out of major interim lows are driven by
gold-futures short-covering buying. That tends to mostly exhaust
itself over a few weeks or so. The red line above shows that’s
exactly what drove gold’s sharp V-bounce out of early October’s
anomalous lows. That short covering finally ran its course in this
latest-reported CoT week, with total spec shorts falling back to
their major secular support at 95k contracts.
Stage one propels gold high enough for long enough to entice back
long-side gold-futures specs. They command much more capital than
the short guys, making stage two much larger. It usually
takes a few months or so for that long buying to largely exhaust
itself. That happens when total spec longs challenge their secular
upper resistance near 415k contracts, which wasn’t even close
leading into this latest FOMC meeting.
Just
over a week before it, total spec longs had plunged to just 286.7k
contracts! That was a whopping 128.3k under that
gold-upleg-topping resistance, massive room for these
super-leveraged traders to keep buying longs to normalize their gold
bets! Considered another way, this young gold upleg was born in
early October when total spec longs were 264.8k. That made for
stage-two buying potential of 150.2k to 415k.
Of
that huge likely capital firepower available for buying longs,
over 85% remained untapped just one week before Wednesday’s
hawkish FOMC surprise! So the gold-futures specs had far more room
to buy than to sell, helping explain gold’s counter-Fed reaction.
Unfortunately we won’t know how much post-FOMC buying they’ve done
until next Friday, when positioning data for the first post-FOMC CoT
week gets released.
So
gold was able to resist the Fed chair because speculators’
collective gold-futures bets were already pretty bearish on gold
leading into this week’s FOMC meeting. While they sure could’ve
dumped more longs on that hawkish surprise, they had way more room
to buy than sell. Thus gold was able to rally even with the Fed
chair taking a March cut off the table. This impressive resistance
has bullish implications.
Gold-futures long specs love chasing upside momentum, piling in to
ride gold rallies amplifying them. With gold defying this hawkish
FOMC, traders’ near-term confidence in it will mount. It won’t take
much more long buying to catapult gold to more new nominal record
closes above late December’s $2,077. More records will greatly
boost bullish financial-media coverage on gold, spreading awareness
of is upleg.
The
longer and higher gold rallies, the more speculators will want to
buy it. The more gold futures they buy, the bigger gold’s upleg
will grow. This virtuous-circle dynamic is powerful in normal gold
uplegs, but new record highs greatly intensify it. Those new
records also pop gold back onto investors’ radars, and their huge
stage-three buying dwarfing all gold-futures buying
hasn’t even
started yet and is all still coming.
Gold’s impressive counter-Fed rallying this week could prove an
important psychological inflection point. Gold’s latest surge
despite a big hawkish surprise ought to help convince gold-futures
specs this young upleg still has lots of room to run. That will
motivate them to pile back into longs, amplifying gold’s gains. As
its upleg resumes powering higher on balance, the resulting new
records should attract lots of new traders.
The
biggest beneficiaries of much-higher prevailing gold prices as that
momentum buying resumes will be the gold miners’ stocks. The
GDX majors
soared 134.1% during gold’s last mighty 40.0% upleg in mid-2020
seeing new records fueled by investors flooding back in. Smaller
fundamentally-superior
mid-tiers and
juniors tend to well outperform, and our newsletter trading
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The
bottom line is gold resisted the Fed chair this week. This latest
FOMC meeting was quite hawkish, as top Fed officials fought back
against traders’ big rate-cut expectations. The statement and Fed
chair both emphasized the FOMC doesn’t yet have enough confidence in
disinflation trends to start cutting soon. Then the Fed chair
unusually all but ruled out rate cuts starting in March, slamming
traders’ hopes.
Yet
despite big reactions to this hawkish surprise in rates and stock
markets, the US dollar didn’t surge and gold didn’t plunge. The
former had already stalled out after bouncing hard, while
speculators’ collective gold-futures bets in the latter were already
bearish. So gold surged out of the FOMC, which should really boost
traders’ confidence in chasing its upside momentum. That likely
rekindled gold’s young upleg. |