Another Week Another Fed Meeting
After finally breaking through key resistance around the $1,300 area last week, the gold market is taking a bit of a breather in early action today. The market appears poised for further upside, and a solid close above resistance or several consecutive closes above could add credibility to the recent breakout.
The market will have numerous issues to contend with this week, including the end of the government shutdown, corporate earnings and the Fed meeting on Wednesday.
Gold may see a slight decline in safe haven demand today following a deal to reopen the U.S. Government late last week. Any decline in demand may, however, be offset by poor earnings figures from Caterpillar and ongoing worries over the effects of the U.S./China trade war.
This week’s FOMC meeting will take center stage and could have significant ramifications for the gold market. Markets will be looking for any further clues about the Fed’s intentions going forward, and the idea of the central bank halting its balance sheet reduction program will be a focal point.
News hit the wires on Friday that the Fed could be nearing a decision to put a stop to its balance sheet reduction. The news sent stocks sharply higher with the benchmark Dow Jones Industrial Average rising by nearly 200 points. Not coincidentally, the dollar index weakened, and gold prices rose sharply.
It is this balance sheet reduction, or lack of, that will likely dictate market action over the next several months. The Fed has been letting $50 billion per-month roll off its balance sheet in recent months, and the contraction appears to be straining liquidity. It is important to keep in mind that the Fed’s previous QE program was essentially an experiment, and now the Fed is trying to figure out a way to normalize its balance sheet and interest rates without throwing a major monkey wrench into global markets.
As has already been demonstrated, the Fed has a very difficult job ahead. The threat of further rate hikes has already sent markets into a tailspin, and the notion of further balance sheet contraction (which is far more important than rates) has investors on edge. The Fed seems to be on a mission, however, to get rates as high as they reasonably can as soon as they can.
The reason for such a course of action is simple: The Fed needs higher rates now to be able to cut again later. Likewise, if the Fed can shrink its balance sheet now, it will be able to again expand it later. If the central bank is unable to do this, it will have very little left in the toolbox to fight the next recession.
Regardless of what the Fed does or doesn’t do, the next recession is coming and could be seen sooner than anticipated.
Rates will be cut again at some point and the Fed could very well have to resort to QE4 in order to fight the next major slowdown. A global slowdown is already evident, and some serious cracks in U.S. manufacturing data also point to a slowing U.S. economy.
That makes now the ideal time to diversify and to build allocations in asset classes that can potentially outperform during such economic stress. Given the likelihood of a weaker dollar, lower stocks and accelerating, there may be no better asset class to add right now than physical gold.
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Don’t wait for the Fed’s great unwind to fuel the next major stock market collapse or recession. Explore your options for gold ownership today. Call Advantage Gold at 1-800-341-8584 to get started now.