GLD Drops 1.78% After FOMC Lockhart’s Confident Florida Speech But Instantly Rebounds

By FX-Analyst

Summary

• There are 2 main forces affecting gold price, Europe and FOMC. The drama in Europe has deflected the media attention which the FOMC deserves.
• Atlantic Fed President and FOMC Voter Lockhart deflected weak inflation arguments against liftoff in mid-2015.
• Lockhart argued that confidence in the progress towards maximum employment and stable prices is sufficient for policy tightening given the lag in monetary policy.
• Lockhart’s compelling argument forced GLD to drop 1.78% and reinforced the bearish trend on GLD.

FOMC Neglected Amid Excessive European Drama Coverage

In today’s context, there are 2 primary forces that are actively influencing the price of gold which we should always keep in mind when we evaluate our gold investment. On one hand, we have the headlines news about Europe and Greece on CNBC, CNN and all the major news outlet. These news station give us an overexposure to the latest flip-flops in the sovereign debt negotiations simply because it is good non-fiction drama that will keep their viewership high.

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Lockhart Neutralized Weak Inflation and Wage Growth Constraint

Let us pay some due attention the Atlanta Fed President Dennis Lockhart who is a voting member of the FOMC this year. Lockhart gave his speech titled, Considerations on the Path to Policy Normalization at the Southwest Florida Business Leaders Luncheon on 06 February 2015. In my opinion, his speech is very supportive of the mid 2015 liftoff in the Federal Funds rates and this is putting pressure of gold as much as it is supportive of the strength of the USD. Lockhart gave a balanced assessment of the economy and discussed the possible constraint on the liftoff alongside with the factors supporting it. He came to the conclusion that based on current data, he is confident that the economy would have recovered to the point where it is conducive for a liftoff in mid 2015.

This quote from Lockhart sums up the challenges of weak inflation and wages increment that is facing the United States today.

Just as current readings of inflation give some pause, broad wage trends seem to suggest we are not yet on the cusp of full employment. The quite modest growth of wages across the economy does not seem normal given the solid growth numbers we’ve seen in recent quarters.

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Lockhart Impact on the SPDR Gold Trust ETF (GLD)

Lockhart has effectively swept away the reminding credible objection to the Fed’s interest rate hike in mid 2015. He devoted the bulk of his speech to that with a smaller part of his speech reinforcing the idea that the economy is on a strong growth trajectory to his audience.

As his primary target audience are Florida businessmen, he made the point that the FOMC is expressing confidence in the economy when it raises rates and this will be self-reinforcing.

From a Main Street perspective, the important point for business planning is that monetary policy is likely to shift sometime this year, and a higher interest-rate environment will ensue. The decision to begin normalization should be a signal that the FOMC is confident the economy is on track to achieve its objectives and that the economy should have sufficient strength and momentum to handle higher rates. The start of the process of normalization should itself instill confidence on Main Street.

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