Gold Approaches $1,900 Amid FOMC Minutes And Crypto Sell-Off

The latest FOMC minutes were dovish, especially in light of the recent increase in inflation and elevated asset valuations. What does it mean for gold?

Yesterday, the FOMC published minutes from its last meeting in April. They’ve shown two things doing that: first, that some of the central bankers are worried about the inflation and elevated asset valuations; and, second, that the Fed is going to remain dovish despite all these concerns.

brass metal frame

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Indeed, some FOMC participants noted that the demand for labor had started to put some upward pressure on wages. Moreover, a number of them pointed out the protracted supply disruptions and the insufficient pre-emptive hawkish reaction from the Fed as potentially inflationary factors:

A number of participants remarked that supply chain bottlenecks and input shortages may not be resolved quickly and, if so, these factors could put upward pressure on prices beyond this year. They noted that in some industries, supply chain disruptions appeared to be more persistent than originally anticipated and reportedly had led to higher input costs. (…)

A couple of participants commented on the risks of inflation pressures building up to unwelcome levels before they become sufficiently evident to induce a policy reaction.

When it comes to financial stability and asset valuations, several FOMC members pointed out elevated risk appetite and very low credit spreads. And certain participants noted dangers related to the low interest rates and excessive risk-taking: if the risk appetite fades, the asset prices could decline with potentially harmful consequences for the financial sector and the economy:

Regarding asset valuations, several participants noted that risk appetite in capital markets was elevated, as equity valuations had risen further, IPO activity remained high, and risk spreads on corporate bonds were at the bottom of their historical distribution. A couple of participants remarked that, should investor risk appetite fall, an associated drop in asset prices coupled with high business and financial leverage could have adverse implications for the real economy. A number of participants commented on valuation pressures being somewhat elevated in the housing market. Some participants mentioned the potential risks to the financial system stemming from the activities of hedge funds and other leveraged investors, commenting on the limited visibility into the activities of these entities or on the prudential risk-management practices of dealers’ prime-brokerage businesses. Some participants highlighted potential vulnerabilities in other parts of the financial system, including run-prone investment funds in short-term funding and credit markets. Various participants commented on the prolonged period of low interest rates and highly accommodative financial market conditions and the possibility for these conditions to lead to reach-for-yield behavior that could raise financial stability risks.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does ...

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