Gold Monthly Fundamental Forecast – September 2016

Gold ended the month at a low for the month trading at 1311.35 and is a strong buy moving into September as the greenback rallied on Yellen – Fischer comments. The question is, Will the Federal Reserve hike the fed funds target rate when it meets again on September 21st? As is often the case, recent Fed guidance has been mixed including from the top of the house. Chair Yellen’s speech at Jackson Hole wasn’t surprising and the only reference of relevance to near-term monetary policy matters was: “I believe the case for an increase in the federal funds rates has strengthened in recent months.” Yellen’s remark was not accompanied by any time-dependent language, while all but two of just over 17 pages of text were devoted to longer run issues concerning future policy flexibility. The absence of such a timing hint leaves open two possibilities: a) Yellen wishes to leave that decision to each game day before the full FOMC, or b) in itself it is a signal to rule out September as too soon given the Fed likes markets to be lined up perfectly for its decisions, or c) she is signaling extreme near-term data dependence.

After Yellen’s speech and in response to a reporter’s question about whether a hike in September and possibly another before year-end was likely, Federal Reserve Vice Chair Stanley Fischer remarked that “What the chair said today was consistent with answering ‘yes’ to both of your questions.” Markets reacted to this remark by driving short-term yields higher along with the dollar and the market probability of a hike in September increased but is still not a base case scenario. It’s possible, however, that Fischer was, well, baited. He could have given the exact same answer to alternative questions, like whether the Fed will hike only once this year in September, or whether the Fed will hike only once this year but not until December. Perhaps he agreed with the reporter on the question to ask ahead of time in full knowledge of what he wished to ask.

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