The Price of Gold “Will Tumble” Today If the Fed Makes This Crucial Decision: Adrian Day FOMC Preview


The Federal Reserve is likely to raise the Federal Funds rate by no more than 75 basis points at the Federal Open Market Committee (FOMC) meeting, despite markets pricing a greater chance of a 100 basis point hike after the Consumer Price Last Week Index Report (CPI), according to Adrian Day, President of Adrian Day Asset Management and Portfolio Manager of the Euro Pacific Gold Fund.

A 100 basis point hike today would not only be unlikely, but also disastrous for the markets, Day told David Lin, Anchor for Kitco News at the Beaver Creek Precious Metals Summit.

“I don’t think they need to make 100 basis points,” Day said. “I think the market expects 75 and the Fed normally telegraphs pretty well.”

Day added that there is no chance of an increase of less than 75 basis points.

“One thing we know for sure, if it’s not 75, it’s going to be 100. It’s not going to be 50,” he said.

Importantly, a greater rise in consensus expectations would “collapse” gold prices and stocks.

“I think 75 is ready already, so if you get 75, gold is unlikely to go down and stocks are unlikely to go down more, and I mean they go down more on that news. 100 would be different. If they have 100. [basis-point hike] I think gold is falling again, “he said.

Day’s comments come as the main CPI for August declined slightly based on an annual percentage change of 8.3%. Core CPI, which excludes food and energy, rose to 6.3% from 5.9% in July.

Immediately following the release of the CPI print last week, the FedWatch tool, which tracks rate hike probabilities by size, saw an increase in the chances of a 100bp hike to over 30%. As of 10:30 am ET on Wednesday, the split is 82 percent for 75 basis points and just 18 percent for 100 basis points.

The price of gold is unchanged on Wednesday morning before the FOMC decision in the late afternoon.

Stocks rose slightly, with the S&P 500 up 0.5% by 10:30 am ET.

Macroeconomic outlook

Unemployment in the United States increased 0.2% last month to 3.7%. Although a small increase occurred over the summer, it is still at an all-time low.

Day said that the unemployment rate in the past has been low at the very beginning of a recession before increasing, and therefore a low unemployment rate is not in itself an indicator of a healthy economy.

“If you take a snapshot and look at the unemployment rate, yes, it’s very strong, like [Treasury Secretary] Janet Yellen and [Fed Chair] Jerome Powell would say. I would say a couple of things. Number one, the participation rate, right up to the last report, was very, very low. The labor force participation rate is falling and it’s low, and all other things are the same, which also makes the unemployment rate low, “he said.” If you look at all the recessions that date back to the 1960s , the unemployment rate was at its lowest immediately before the peak of a recession. Having a low unemployment rate doesn’t mean we won’t have a low recession. ”

On consumer sentiment, Day cited a decline in optimism as the University of Michigan Consumer Sentiment Index continues its summer decline. It is now below the 2008 lows and is at the lowest level since the data was reported in the 1970s.

While retail sales rose 0.3% last month, Day said this actually signals a decline in consumer purchasing volume.

“When retail sales are static and only going up a little, when prices go up 10%, it means the volume, the volume of people, is going down,” he said.

Day said the Federal Reserve will continue to raise rates in this economic slowdown, but will stop and turn right before they cause a “severe recession.”

For more information on Day’s gold price long-term outlook and its inflation expectations, watch the video above.

Follow David Lin on Twitter: @davidlin_TV

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee this accuracy. This article is for informational purposes only. It is not a solicitation to trade in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article disclaim any liability for loss and / or damage resulting from the use of this publication.

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