Hats off to Yellen

Hitting a sensible balance between expectations and realities, the Federal Reserve said No to any near-term rate raises. Gold bounced and the greenback slid, creating breathing room for the yellow metal. But US markets also ascended, perpetuating mining's real problem: investors can find better odds elsewhere.

The Federal Reserve was not in an easy position. Anticipation of a rate raise by June, if not by April, had built to a frenzy leading up to today’s news conference. Consensus was that to not signal a move to higher rates would hurt confidence in the US economic recovery.

Turns out the US economy did that job itself. Economic data from the world’s largest economy has been weak of late, including lower retail sales, reduced home construction, limited industrial production, weaker consumer sentiment, and flagging wage growth.

Meanwhile, an ever-stronger US dollar has made US goods and services more expensive in other countries. A rate raise would add to that pain for American exporters by strengthening the dollar more while also increasing borrowing costs, while international competitors enjoy rate cuts, devalued currencies, and cheap loans.

So, despite all the pressure and expectation, there’s no way Yellen could have suggested raising rates. It would have punched a recovering-but-still-ill economy in the guts.

Instead, she removed the word ‘patient’ from the timeline for a raise while cautioning that the Fed would wait to raise rates until it saw “further improvement in the labour market and is reasonably confident that inflation will move back to its 2% objective over the medium term.”

To back its point the Fed lowered its forecast for US growth in 2015 to 2.3-2.7%, from an earlier forecast of 3%. In fact, the central bank revised lower all four key economic projections: real GDP, unemployment, headline inflation, and core PCE (personal consumption expenditures, which encompasses goods and services targeted towards individuals) inflation.

That's pretty serious. The US is doing ok, but not great. Given that, should its stock markets be sky high?

It’s also worth noting that Yellen’s inflation target of 2% is pretty much a pipe dream. If that truly is the goal, rates won't be moving up anytime soon.

In response, gold and the US markets jumped.

Gold gained 2% to hit $1,174 per oz. before settling some to end the day at $1,166. The Dow Jones Industrial Average rose 1.3%; the S&P notched a similar 1.2% gain.

What does it all mean for gold?

In the short term, it relieves some of the intense pressure that has pushed the price down in recent weeks. It gives gold, and therefore gold equities, some breathing room.

It also decreases the drive to the dollar, which lost ground today. A weaker dollar will help gold.

In the longer term, it doesn’t change much. Not raising interest rates perpetuates the status quo: the promise of low rates for longer gives US equities enough of a boost to keep those markets going. As long as the US markets continue to perform (or at least are not sliding), gold equities will struggle to attract investor attention.

So it’s a mix of good and bad. The breathing space Yellen just created could give gold a chance to rally and regain some lost ground. US markets that continue to perform, however, will limit longevity of that rally and the leverage equities feel from it.

I like the breathing space, but as much as that I love that tomorrow will be the first day in ages when I might just be able to get through the day without a new story or conversation about US interest rates.

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