It’s Not All About the Fed. Oh Wait, Yes It Is!

Maybe it is not surprising that central bankers have become the rock stars of the economic policy world. Government leaders around the world, not just in the U.S., seem paralyzed, either by upcoming elections, referendums, or simply not knowing what to do.

We saw this yesterday in the strong market reaction to yesterday’s announcement from the Federal Reserve (Fed). It was possibly more dovish than expected, but hardly a bombshell. Yet, the chart below shows a market clearly waiting for the announcement (there was relatively little market movement in the morning) and then reacting sharply. Major foreign currencies gained on dollar weakness, as did gold.

The Fed Moves Markets

Source: LPL Research, Bloomberg 03/17/16  9:45 a.m. ET
The U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar. The DXY Index does this by averaging the exchange rates between the US dollar and six major world currencies.

All of this underlies the larger story of continued loose monetary policy and continued currency uncertainty. It is probably too strong to suggest that countries are actively engaging in a currency war, but central banks and governments certainly seem, at best, indifferent to the impact of monetary policy on currency. Central banks have also failed to coordinate any policy response to global stagnation, most recently at the G20 meeting in Shanghai.

To us, this suggests strength in gold as a potential safe haven from currency volatility. We are not traditional gold bugs or long-term strategic gold holders. However, we also cannot ignore the fundamental backdrop, or the technical signals, that are making gold attractive in the short term.

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The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

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The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments.

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