How Will The Fed Impact GLD This Time?
Summary The price of GLD declined in the past few days as the U.S. dollar rallied. The FOMC meeting will convene again this week. How will the upcoming FOMC meeting impact the price of GLD? The U.S. dollar has changed course and rallied in the past few days, which also dragged back down SPDR Gold Trust ETF (NYSEARCA: GLD ). In times when central banks aim to provide more liquidity: The ECB may expand and extend its QE program and cut rates in December, People Bank of China reduced again its rates, and Bank of Japan may ramp up its QE program this week (although the chances are low for this upcoming meeting); it becomes less likely for the FOMC to raise rates. And as long as the Fed delays its rate hike to a later date, precious metals are likely to benefit from it. This week, the FOMC will convene again for its penultimate meeting for the year. This meeting won’t include an economic update or press conference. The current market expectations , as derived from the bonds market, are for only 6% chance of a hike announcement in the coming meeting. The most likely scenario is for the Fed to publish a succinct statement with little changes to the wording in order to keep the possibility of raising rates in December. If so, GLD isn’t likely to have much of a reaction. But what does it mean about the December meeting? The two mandates of the Fed relate to labor and inflation. Since the last meeting, the reports related to these two mandates aren’t making the decision any easier. From the labor market perceptive , the NFP and JOLTS weren’t impressive. And even though unemployment rate is low, wages aren’t picking up any faster with a steady growth rate of 1.9%. When it comes to inflation, the last CPI report showed the core CPI reached 1.9% – very close to the Fed’s target inflation of 2%. It still seems that the Fed may decide to err on the side of caution and maintain its rates low this year and only raise rates around Q1 2016. If the next two NFP reports show another slow growth in jobs (fewer than 150,000 jobs per months) and little change to growth of wages, these reports will make it a bit easier for the Fed to delay it decision to next year. The changes in market expectations over the timing of the Fed’s rate hike is demonstrated in the rise and fall of short-term interest rates in recent months, as you can see in the following chart. (click to enlarge) Source: U.S Department of Treasury and Google finance The latest rally of GLD isn’t only related to the depreciation of the U.S. dollar. But that’s not all. Its rally is plausibly related to the decline in interest rates. In the past few months, the changes in the market expectations of short-term interest rates are strongly correlated with the daily shifts in the price of GLD – the linear correlation is around -0.41 over the last four months. The gold market has benefited from the recent weakness of the U.S. dollar and fall in interest rates. And if the Fed issues another dovish report or even keep its statement unchanged, this could provide another short-term boost for GLD. But as other central banks aim to turn more dovish by cutting rates or increasing QE programs, the upward pressure on the U.S. dollar will intensify, which is likely to bring down GLD. Therefore, even if GLD were to rally in the near term as the Fed delays its rate hike, the actions taken by other central banks could bring back down GLD in the coming months. For more please see: ” GLD Continues to lose its appeal “.