Gold Rally Hinges on What Fed Minutes Say on the Economy

Gold’s advance this year surprised analysts from Morgan Stanley to Goldman Sachs Group Inc. and Deutsche Bank AG. What happens next hinges on the Federal Reserve Open Market Committee minutes, due this afternoon, on the March meeting when it started scaling back stimulus.

Since mid-March, hedge funds and other speculators misjudged gold in two of the past three weeks.

Now bullion, which slipped 0.2 percent to $1,306 an ounce as of 11:21 a.m. in New York, will take its cue from how determined policy makers are to start raising interest rates, James Steel, an analyst at HSBC Securities (USA) Inc., said in an e-mailed report yesterday.

In Morgan Stanley’s view, it’s hard to imagine how gold could keep rising given the bank’s forecasts that equities, credit and the dollar will strengthen. They’ll just call what happened in the first quarter “exogenous shocks.”

When it comes to gold, what isn’t “exogenous?”

Gold is hardly alone in reeling from prospects of war or the Fed’s hints about the state of the economy. What’s unique is gold’s lack of its own fundamentals.

Stock prices are tied to corporate earnings. Currencies are linked to economies. While technically gold has supply (mining) and demand (jewelry, electronics and 55 tons of teeth, according to Morgan Stanley), that’s not usually what inspires people to buy or sell gold.

More than perhaps any other market, bullion acts as an echo chamber for investors’ anxieties about economic growth, geopolitical conflict and guessing what Fed policy makers are thinking.

Global Growth

The minutes will follow a report from the International Monetary Fund yesterday cutting its global growth forecasts. Central banks are contemplating raising rates even as advanced economies are yet to fully recover from the global recession. A disappointing U.S. jobs report last week sent gold up the most in three weeks.

Bank analysts are chalking up the spotty U.S. economic data earlier this year to cold weather and sticking to their bearish bets on gold.

If the Fed minutes today reveal policy makers will stick with more stimulus cuts and that higher interest rates are on the horizon, it’s going to be more reason for the bears to double down.

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