The much anticipated Federal Reserve monetary policy meeting concluded Wednesday. No changes to interest rate were expected after the disastrous jobs report for the month of May. What was keenly awaited was the Fed statement. Market was looking for clues on when the Fed will hike interest rates. The statement suggests that the central bank has turned dovish yet again.
GLD and GDX Find Favor Again
The market has been proven right once again. In May, the minutes of Fed's April FOMC showed that the central bank is considering rate hike in the summer. This was repeated by the Fed Chair Janet Yellen a few days later in a speech. The sudden hawkish stance of the Fed, which had been giving conflicting signals since the start of this year, took markets by surprise.
The SPDR Gold Trust (NYSEARCA:GLD) and the Market Vectors Gold Miners ETF (NYSEARCA:GDX) had seen an excellent run until then. Both saw a sharp pullback on Fed's hawkish tone in late May. However, the bearish sentiment was temporary. The disappointing jobs report for the month of May meant that the Fed was unlikely to hike interest rates at its meeting this week. Apart from the slower jobs growth, the Fed is also worried about Brexit.
The decision to hold interest rates has given a fresh boost to both, GLD and GDX. On Thursday, both were higher. But what about the pace of future rate hikes. That is more important to know to take a call on gold. The Fed's outlook suggests that central bank has once again turned dovish.
The Fed continues to expect two rate hikes for 2016. But a summer rate hike has been ruled out. That would mean the Fed will have to raise rates ahead of the Presidential election in November. Historically that has never happened. So at most, we are looking at just a solitary rate hike.
What was also interesting in the recently concluded meeting was that Esther George, who is the Kansas City Fed Chief, turned dovish as well. She had previously dissented and called for higher rates but dropped her call in yesterday's meeting. Also, the Fed has lowered its rate forecasts for 2017 and 2018.
All in all, these are good signs for gold. In fact, the paring back of rate forecasts for 2017 and 2018 makes GLD and GDX longer-term bets. I believe that the precious metal could also gain some momentum in the very short term on Brexit fears.
I had noted in my last article how Brexit worries have resulted in volatility returning to the market. With exactly a week to go before Britain votes on its future in the European Union (EU), I think the ProShares Trust Ultra VIX Short Term Futures ETF (NYSEARCA:UVXY) could see further upside. Recent polls have shown that the Leave campaign has an edge in the referendum. That could change though following the unfortunate incident earlier today. Labor MP Jo Cox, who had been supporting the Remain campaign, was shot and stabbed by an unidentified man. Ms. Cox succumbed to her wounds later. Reports suggest that her attacker shouted "Britain First" during the attack. The Leave campaign is likely to lose momentum because of the attack although one will have to wait for the polls to see the impact. Even if the Leave campaign loses momentum in the coming days, I believe volatility will remain high ahead of the referendum, which should boost UVXY further.
XLF Is A Sell
The Fed's rate forecasts for 2017 and 2018 is bad news for the financial sector, especially regional banks. Regional banks rely on net interest margins, which of course have been impacted by the low interest rate environment. Given that the low interest rate environment is expected to persist, I see some downside in the SPDR Financial Select Sector Fund (NYSEARCA:XLF). XLF rebounded in late May on the possibility of a summer rate hike but has seen a sharp pullback since the weak jobs report. I believe that the paring back 2017 and 2018 rate forecasts is not priced into XLF.
To sum up, the last few weeks have created an uncertain environment for gold bulls. But with the Fed meeting out of the way and given the central bank's dovish stance, I believe it is time to take a fresh position in gold. As I noted, the precious metal also stands to benefit in the very short term from the Brexit uncertainty.
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