In a bumpy week for gold trading, the precious metal edged slightly higher for the second consecutive week, with most of the gains coming from the days leading up to the much anticipated Fed meeting minutes. As soon as the minutes were released online Wednesday, gold futures for December delivery were so volatile, prices ranged from $1,340.50 to $1,352.60 per ounce within the span of about two minutes.
Among other things, this powerful reaction to the details of the meeting displays the Federal Reserves impact on the gold market, because traders and investors are looking to dissect every last word of the meeting in hopes of gaining clarity on rate hike timing.
The minutes very clearly showed that Fed policy makers are not willing to raise rates until they are fully in agreement on the outlook of the US economy. Naturally, the idea of Fed officials not wanting to damage the economy by raising rates prematurely is beneficial for gold, so prices rapidly recovered from the initial sell-off to $1,340.50.
The minutes also showed that many Fed officials want to hold off on a rate hike until they see further signs of economic growth and inflation. Jim Steel, an analyst at HSBC, noted the longer the Fed delays a rate rise, the better for gold.
Besides the fact that low interest rates are generally thought to be favorable to gold, the idea that the US economy may not be as robust as it seems could have also contributed to the intraday rally.
Nevertheless, gold managed to lose some steam and didnt finish the week as strong as many analysts expected. Gold has traded between $1,360 and $1,340 per ounce for the last three weeks with the exception of three days where it broke above $1,360, but this was evidently not sustained.
Markets across the board are famously quiet this time of year, so volume is light and liquidity is often scarce. Therefore, rapid, knee-jerk like reactions (like after the release of Fed meeting minutes) are to be expected since there is limited market depth to absorb large buy or sell orders.
Comments from New York Fed President William Dudley and San Francisco Fed President John Williams spurred a minor sell-off for gold on Friday. Since there is not a significant amount of economic date coming out, investors are observing Fed officials very closely for any cues on interest rates. The slightest comment that vaguely hints at when or if a rate hike might occur can have shockingly dramatic impacts on gold.
With that said, investors should buckle up. In the coming week, Fed Chair Janet Yellen (along with a host of other central bankers)will be speaking at the annual Jackson Hole Monetary Policy Conference on Aug 26th. For an event that only occurs once a year, and with Fed officials who are clearly timid about the US economy, the impact on gold should be dramatichopefully to the upside.