GoldPrice.

Gold prices are down this afternoon from a 10-month high point after the Fed’s discussion minutes from the January FOMC meeting painted a picture of a more balanced committee outlook than the market had inferred from Chairman Jerome Powell’s statement and press conference three weeks ago. Having sold off for nearly $8 ($10+ from the highs of the day) gold spot has rebounded back above $1340/oz at the time of writing. Some degree of the selling pressure post-release can likely be attributed to that fact that poor East coast weather prevented the Fed from distributing advance copies of the minutes to press outlets; as a result, many traders and investors were having to quickly analyze the release live which injects some volatility into the psyche of the market a whole.

It appears to be the case that the initial sell-off in gold in the wake of the Fed minutes was largely driven by the surge in its’ inversely correlated assets like the US Dollar and equities markets. Stocks, already on a real tear to start 2019 after December’s collapse, re-doubled their enthusiasm for January’s surprisingly dovish FOMC statement as the associated meeting’s minutes confirm, as Bloomberg describes it, “widespread agreement” about ending the runoff of the Fed’s balance sheet in 2019. Equity markets had been naming the dwindling balance sheet as a source of financial tightening and major downward pressure on stock markets.

Latest ➡️ Federal Reserve minutes showed widespread agreement on ending the runoff of the central bank’s balance sheet this year https://t.co/K3fBu7MHik pic.twitter.com/bnOgdlR8Gr

— Bloomberg Economics (@economics) February 20, 2019

The FOMC meeting minutes also shed some light on topics that will be more instructive for gold and currency traders going forward. There was acknowledgement of a still strong labor market and the recognition of the possibility of a building slowdown in China and other major global economies and the pressure that might apply on financial conditions worldwide.

Most important though, I believe, were the committee’s discussion around and comments on inflation and their outlook for it. The FOMC acknowledged that this was a big driver in their decision to remove the forward guidance about continuing to hike rates and institute the current “Fed pause” in order to assess the economic environment in the wake of 2018’s rate increases. For me, this puts a blazing spotlight on read of US inflation over the coming months. This, from Bloomberg, demonstrates how vital the next move in inflation is to the majority of the FOMC regardless of the rate path they support:

While several said rate hikes might be necessary “only if inflation outcomes were higher than in their baseline outlook,” several others said that if the economy evolved as expected, higher rates would be appropriate later this year, according to the minutes.

My takeaway from this kind of message is that a marked rise in inflation over the next six months would support the hawks’ desire to continue raising rates and compel the more dovish members to agree or risk over-heating the economy; a clear decline in inflation over that same period would almost certainly halt rate hikes through the end of this year and, at a certain point, even begin to force the discussion of cutting rates.

Perhaps the rebound in gold spot prices from today’s 2pm EST sell-off is in reaction to currency and metals traders’ view of which direction inflation already seems to be moving in:

This inflation chatter in the Fed minutes is interesting -- participants took heart in the stability of survey-based expectations. One of those indexes has since gone from stable to soft. https://t.co/oduXlQszHC pic.twitter.com/PngK8qs52O

— Jeanna Smialek (@jeannasmialek) February 20, 2019

After some late-lunch excitement, gold prices seem to be setting up well at and above $1340/oz, and the price action should go a long way to establishing firm support in the $1337-40 range.