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Posted by on Jan 25, 2016 in Market Insight

Markets Forcing The Fed’s Hand?

Markets Forcing The Fed’s Hand?

January 25, 2016

Dennis Gartman has been directly involved in the capital markets since 1974 and has been publishing his daily commentary, The Gartman Letter, since 1987. Mr. Gartman is a strategic partner with the AdvisorShares Gartman Currency Hedged Gold ETFs (GEUR & GYEN) and lends his institutional insight to educate advisors and investors about trading gold in different currency terms.

The “Big News” this week shall of course be the FOMC’s two day meeting that begins tomorrow and which ends Wednesday and the Bank of Japan’s two day meeting which begins Thursday and ends Friday. The FOMC meeting shall end with no further action being taken and with none likely at the March meeting either. Although Fed Vice Chairman Fischer has suggested that the Fed might possibly raise the overnight fed funds rate four times this year, the makeup of the voters on the Committee is rather decidedly “dovish;” the weakness in US and global equity markets along with the less-than-hoped for strength in inflation along with the feared weakness in the Chinese economy shall be sufficient to keep the Fed on hold. Certainly were we on the Committee and were we voters, and given the weakness abroad, the recent news regarding unemployment claims, the less-than-robust consumer spending numbers, and the strength of the US dollar we’d vote to hold policy steady. So too shall the “voters” on the Committee.

As for the Bank of Japan, their game shall be a bit different for the recent strength in the Yen has to be a bit of a concern, as are the concerns set forth above that the FOMC shall ponder, and at the meeting’s end we suspect that the tendency on the part of the Bank shall be to expand its supplies of reserves to the banking system. It needs to do so and we suspect that those on the monetary policy committee shall see things that way.

Turning to gold, it is stronger this morning in US dollar terms is making its way toward $1105. More importantly to us it is making its way upward toward… and actually very modestly through… €1020/oz. The game in gold does not really get terribly interesting until such time as spot gold in US dollar terms makes its way upward through $1110. It shall become even more interesting when it moves upward through €1025/oz. We await those circumstances.

We are of the mind that the game really began to change last week when Mr. Draghi said that he and the others on the monetary policy committee there were prepared to begin another round of more aggressive monetary ease at the Bank’s March meeting and that they had plenty of monetary weapons at their disposal and were prepared to use them. This was, we think, the signal to start European quantitative easing once again and as such shall be responsible for sending EUR denominated gold materially higher over time.