The much-anticipated Fed meeting last week was incredibly dovish. We expected a “hold” but a bit of hawkishness from the dot plots, press conference or future implications. Instead, the meeting showed little indication that this committee is in any hurry to get off the Zero Rate Lower Bound and begin rate normalization. One of the dot plots even implied outright negative rates expected for the end of this year and beginning of next before rising to 1% in 2017. That dot is generally thought to belong to Kocherlakota (Minneapolis), who is retiring this year, but the fact that it is even a published thought spooked markets.

There is a bit of a change in paradigm for risk markets here as the FOMC hold and comments can easily be interpreted as a vote of no confidence in the economy. Since the announcement, long and short rates are lower, equities are down and gold is up, if mildly. At the end of the day, I can certainly understand the argument for the bigger risk being a move too early than too late, but it still felt like a missed opportunity. The cynical interpretation of course is that we are using accommodative monetary policy to keep the interest bill low on our profligate fiscal spending and national debt. Every time they hold, that chorus line gets harder to silence. We will have to pay a lot of attention to voting member speeches over the next 6 weeks and the release of the Minutes on Oct 8th will be fascinating.

Bull Case

– FOMC last week was incredibly dovish. They appear to want to hold off on a hike until inflation data absolutely forces them too.

– Interest rates across the curve are lower, putting less opportunity cost on non-yielding assets/metals.

– Equity market sentiment is turning negative quickly. There were tons of bearish analyst notes out over the weekend with the following concerns:

                1. Macro – EM growth floundering and FOMC hold does not inspire confidence

                2. Fundamental – Valuations somewhat better, but stronger USD will hurt corporate earnings abroad

                3. Technical – I’ve seen lots of charts about SPX Head and Shoulders pattern, but this is roughly the 8th clear signal from this pattern alone since 2008…

– SGE premium has been consistently strong for the last couple of weeks, averaging around $5. Are mainland consumers fleeing stocks for gold?

– CFTC positioning is very noisy as we have had FOMC and massive volumes since the Tuesday recording, but GC in particular is definitely back near cyclic lows (late July levels marked a bottom)

– ETF holdings appear to be stabilizing a bit, as we have largely oscillated around 21.7MM oz in GLD out of 48.7MM oz in total ETFs

– Physical coin and bar demand, especially in silver remains very strong and supply constraints continue to drive premiums ever higher. Rounds are at +$1 wholesale and Silver eagles +$5 and higher.

– Has the FOMC quietly accepted a third implied mandate for market stability? It certainly feels like it.

Bear Case

– Base metals and energy/products continue to be extremely volatile amid demand concerns on slowing EM growth.

– Indian demand for gold is surprisingly tepid amidst price uncertainty and poor monsoon rainfalls

– Put skew is near cyclic lows, leaving room for downside without much need to cover delta/gamma risk

– Lockhart is in the midst of a 3-day speaking blitz and the message appears to be that hikes could still happen this year.

– Williams (a centrist and long-time Yellen associate) said that no-hike was a close call

– USD strengthening a bit on the back of these comments, perhaps Dec is still on the table?

– Scrap and refining volumes and hedging picked up a bit on the pop, as you might expect and we see a lot of hedging north of $1130 and $15.

Chart 1: Econ surprise index. We have visited this index a lot, but it appears that we may have run out of steam since early July, according to the Bloomberg index (white line). Could this be one of the factors holding back the FOMC?  That’s the Citi version of the same thing in green.

Chart 2: The treasury curve has taken a nice even shift lower, with the 30yr UST even dropping back below 3%. This is generally bullish for metals as long as the trend continues. I’ll mostly watch the 2yr and see if it can hold below 70bps.

Coin Toss: We are hemmed in by a bunch of technical levels: 1100 (psych and 9/11 lows), 1112 (bottom of cloud), 1117 (50 DMA) and above us: 1135 (converging), 1142 (top of cloud) and 1151 (100 DMA). Unless we break 1148 and 1170 soon, the trend of lower highs and lower lows is somewhat in place. We seem to be running out of momentum to the upside, which will add to the resolve of the CTA shorts. We expect some range bound trading, but our bias is back to lower on the lack of follow-through upside post-FOMC.

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