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Gold: Watching the Fed

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The U.S. economy has rebounded from its winter slump – but recent data continue to present mixed signals, leaving the Federal Reserve and most Fed-watchers alike uncertain about the timing of the much-anticipated first step-up in the Fed funds interest rate.

One thing is for certain: The gold market and other financial markets already expect the coming hike in interest rates later this year – and anything else could prove to be a plus for gold.

Regardless of the timing – September, December, or sometime next year – we do know for sure, barring a setback in economic growth, the Fed will sooner or later begin “watering down the monetary-policy punchbowl” by retreating from its near-zero interest rate policy that has ruled financial markets – including gold – for the past few years.

Reading between the lines, it strikes me that the Fed’s real concern is the possible negative reaction of stock and bond markets to its first baby-steps toward “normalized” interest rates.

In terms of timing, the Fed has said it will continue to be “data-driven.” In other words, if the economic data – for personal income and consumption, housing and employment, consumer-price inflation, etc. – continue to improve, the Fed will feel comfortable raising interest rates sooner rather than later.

Readers of these Rosland Gold Commentaries know we have long worried that the U.S. economy (along with most other major economies) will continue to disappoint with sub-par long-term economic growth, even if we have some short-term improvement in the indicators.

The real worry for monetary policy – and the prospects for interest rates – is the not insignificant chance the Fed will be forced to reverse itself – maintaining an accommodative monetary policy rather than beginning to tighten as the Fed has promised and the markets now expect.

Indeed, there’s a good chance that U.S. and world financial markets will go ballistic with Wall Street losing 10-, 20-, even 30-percent of its then-current value at the first signs of Fed tightening.

In the wake of the latest policy news from the U.S. Federal Reserve, gold has again climbed back above the technically important $1200 an ounce price level. Importantly, if sustained for a few days, gold’s latest recovery will do much to improve the market’s technical health, setting itself up for another assault of the $1240-to-$1260 zone that in the past year has proven to be a difficult area of overhead resistance.

Still, it may well prove to be developments in other spheres that drive gold prices in the days and weeks ahead.

For one thing, the Greek debt crisis is looking less likely to resolve itself without some cataclysmic turn of events . . . and the timetable for this deeply indebted country to repay its next tranche of loans runs out at the end of June.

Just as unpredictable are the consequences of re-armament in Eastern Europe with the United States delivering weapons to a number of its Eastern European allies . . . and Russia countering with the deployment of new intercontinental ballistic missiles aimed at the United States.

Developments of this sort have move gold prices quite sharply in past decades . . . and could do so again.