The July 31 – August 1 Federal Reserve policy meeting came and went without much fanfare this week. The Fed kept its interest rate policy stable for the time being, with the central bank’s target rate stationary at 1.75% – 2.00%.
The next increase is more probable at the September 26th meeting. Where markets are already pricing in a likely 0.25% rate hike.
In his policy statement, Fed chairman Jerome Powell expressed only mild concern that inflation in the U.S. has increased from 1.5% a year, prior to 2.5% at the end of Q2 2018. Of course, this is an astonishing 66% year-over-year increase. Should inflation continue to advance at that rate, it would represent a definite point of concern for policymakers in charge of the world’s reserve currency.
However, the Fed indicated in its policy statement that it believes “inflation expectations will moderate” over the coming quarters.
Fed Has the Market Convinced
The market seems convinced that the Fed is to be taken at its word. For the time being, the sum of the market’s participants believe that it is simply “ok” for the central bank to print money, for example, to bail out its member institutions when they over-extend themselves (i.e. financial crisis of 2008), and then to tighten monetary policy when those same institutions are once again sound (i.e. 2015 through present).
We entirely and whole-heartedly disagree that such a policy is acceptable. If anything, a deliberate policy of currency inflation which benefits a privileged class is equivalent to institutionalized theft. The general population pays as the purchasing power of dollar-savers is debased year after year in a systematic redistribution of wealth. Savings are literally transferred from the middle classes to the upper echelons of the elite who hold a primary interest in the institutions that the Fed bails out with newly-created currency.
Our Beliefs Versus Market Reality
However, it is here that we lay our own beliefs aside and differ to the summary judgment of the market itself, for the practical timeframe ahead of us.
For example, we may not believe that what the Fed is doing is correct – but the sum of the market still does. Inflation expectations remain low, the stock market is booming, and safe-havens including precious metals have softened in recent months.
Do we wish to remain correct in theory but on the wrong side of the market? Certainly not. Defensive action should be taken when the bulk of the evidence shows us that the Fed has the world comfortably placed in its fiat-laden pocket.
Please know this: our fundamental beliefs remain that inflation is theft. Eventually, the world at large will wake up to this fact. When that happens we expect that the advance for gold seen in 2016 will resemble a mere warmup. Yet we will strive to balance this knowledge with the direct observations of how the market itself is behaving. The study of the market’s behavior is, in essence, what technical analysis is all about.
Gold Price Update
Following the Fed announcement, gold was flat for the week. Closing at $1,223 as of the final trade on the New York COMEX on Friday afternoon.
A rebound is due over the short run: momentum indicators are oversold based on the decline of recent weeks, and gold is now within an important area of support between $1,180 – $1,215, corresponding with significant swing lows from 2017. We expect that a recovery rally is due to start any day.
The key question will be: can gold recover its broken 2015 – 2018 rising support level? If such a recovery occurs, the trend breakdown of recent weeks will be negated. With this, a new primary advance could develop.
However, if gold fails to recover its broken trend in the coming weeks, we can predict lower prices for next year.
Let us monitor the coming rebound as it develops. Even as the Fed has the world convinced that its “healthy” level of inflation is here to stay.
Bullion Exchanges Market Analyst
Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency.
Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.
This article is a third party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.
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