Gold is consolidating at the low end of the recent range, weighed by a strong dollar, but supported by mounting geopolitical risks and ongoing uncertainty about the health of global economies. The latter is contributing to uncertainty about central-bank policies moving forward.
China Unrest
Democracy protests in Hong Kong grew over the weekend, adding to already heightened geopolitical risks. Protesters and the police clashed and the Chinese government is reportedly concerned that the movement might inspire similar protests elsewhere in the country. The Economist called it “one of the most difficult tests of Chinese rule since Tiananmen.”
With the Chinese economy slowing, civil unrest is the last thing the communist leadership needs right now. This may prompt them to be overly harsh on the Hong King protesters. It also may make them a little more aggressive in efforts to maintain growth above the 7.5% target.
Ukraine, Too
Renewed fighting has broken out between pro-Russian rebels and the Ukrainian military in Donetsk. Nine Ukrainian forces were reported killed in fighting around the Donetsk airport. At least three civilians have apparently been killed as well. While officials continue to say the three-week old ceasefire is holding, in reality, that doesn’t seem to be the case.
Chicago Fed dove Charles Evans gave a speech, Monday, entitled, Is It Time to Return to Business-As-Usual Monetary Policy? A Case for Patience. His answer to that question is an unequivocal ‘no’. Evans says, “I am very uncomfortable with calls to raise our policy rate sooner than later.”
Word On Rates
In a pre-speech interview with Steve Liesman on CNBC, Evans said it will be “quite some time” before the Fed hikes rates. At one point Liesman asked Evans how he justifies “extreme policies” at this time. To which Evans responded “…you have to be kidding me…” before launching into a list of the problems presently facing Europe, Japan and the emerging markets.
I’ve said repeatedly that it strikes me as unlikely that the Fed will raise rates with Europe and Japan moving aggressively in the opposite direction. Mr. Evans seems to agree. That being said, it may be that the markets have overpriced ‘policy-divergence’ and the dollar and gold need to correct.