The Fed Decision's Big Impact On Gold And Oil Prices

by: James Cordier

(Video Transcript)

James Cordier

Good afternoon, this is James Cordier of with a market update for June 17th. Well, this past week Janet Yellen and the Federal Reserve did what was very well advertised, and that was raising rates by another 0.25%. Certainly not a big deal. Basically, all market analysts and participants were certainly expecting that.

What did come out yesterday, I think, however, is practically monumental and it's historic. We're all familiar with what happened some eight or nine years ago and that was something called QE. "Quantitative Easing", a way to actually drive interest rates down to zero and, in some cases, below zero.

What happened yesterday was the announcement of finally reducing the Fed's balance sheet, a balance sheet that has ballooned up to $3.5 trillion. The plan is to reduce this balance sheet by some $600 billion a year over the next few years and bringing it down to the neighborhood of $1 trillion.

It's so interesting some several years ago, the discussion of Quantitative Easing and what it was going to do for economies and what it was going to do for inflation. Certainly, people who have never invested in gold, never bought crude oil, and never did anything like this all of a sudden became mainstay.

The idea of owning gold or owning oil and being part of a portfolio and a storage of wealth definitely had mixed results over the last eight or nine years. Sitting at my desk, I think we just turned the page on that entire idea. Will the gold market ever rally again? Of course, it will. Will crude oil prices ever get $2 and $3 increases from time to time? Of course, they will as well.

However, they're gonna start doing it now on their own accord based on fundamentals. One of the fundamentals for oil to rally now is going to be "we're consuming more than we're producing". Certainly not the case right now; we think that oil prices are going to languish in the 40s here for quite some time. As we go into the third and fourth quarter of this year, we really see oil prices having a difficult time getting much higher than where they are right now. As a matter of fact, they could be a few dollars lower, would probably be better idea.

As far as the gold market, it's trading around fairer value right now, around $1,260 an ounce. For gold to rally, it will need to see some inflation. We keep talking about inflation at goals of 2% in several different zones in the United States as well as Europe. There was talk that we finally achieved that, and then of course, this past week or two, those hopes were dashed that inflation was running at levels that the Federal Reserve was interested in having, and certainly, that's not the case yet again.

The gold market has to have some sort of banking crisis. It has to have inflation. It has to have something along these lines to cause investors to think that it's a good investment, and right now, that market is certainly lacking all of these. The gold market will always rally $25 and $50 from time to time based on different knee-jerk reactions to market analysis.

However, gold, oil, stores of wealth, we think that that page has turned this past week. We do love the idea of selling options in those commodities going forward. A lot of ideas right now of volatility finally creeping back into the stock market and commodities markets are giving us what we think are probably the best opportunities to come along in quite some time.

The end of quantitative easing is certainly one of those and that is an opportunity builder right now. We're not going to discuss all the opportunities that we think are coming up right now in the next 30 days. We're going to be putting those in clients' accounts, and we'll be discussing those more in future updates that I'd like to give you.