Editorial: Easy does it for the Fed

The U.S. Federal Open Market Committee’s latest statement on March 18 after its two-day meeting drew attention from those keen on understanding the health of the global economy, including commodity investors and miners.

In a nutshell, the Fed is less concerned about the recovering U.S. economy and more inclined to raise interest rates — but not right away.

The Fed sees that labour market conditions in the U.S. have improved further, with strong job gains and a lower unemployment rate; underutilization of labour resources is continuing to fall; and household spending is rising moderately as declining energy prices have boosted household purchasing power. It also notes that business fixed investment is advancing, but the recovery in the housing sector remains slow and export growth has weakened.

The Fed said inflation “has declined further below the committee’s longer-run objective [of 2%], largely reflecting declines in energy prices” … and that “survey-based measures of longer-term inflation expectations have remained stable.” It anticipates that inflation will “remain near its recent low level in the near term” but “rise gradually toward 2% over the medium term as the labour market improves further and the transitory effects of energy price declines, and other factors dissipate.”

Noting that its mandate is to foster maximum employment and price stability in the U.S., the Fed further commented that “with appropriate policy accommodation, economic activity will expand at a moderate pace, with labour market indicators continuing to move toward levels the Committee judges consistent with its dual mandate.”

With regards to interest rates, the Fed said has “reaffirmed its view that the current zero–0.25% target range for the federal funds rate remains appropriate,” but that “an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting.”

Gold prices softened below US$1,150 per oz. the day before the Fed statement on fears that a rate hike might come sooner than later and thus create a stronger U.S. dollar to the detriment of all U.S.-dollar priced commodities.

But the Fed’s moderate statement on the timing and scale of any future interest rate hike prompted gold prices to spike above US$1,170 per oz. in the minutes after the statement was released.

Silver, too, spiked US40¢ in a few minutes to US$15.90 per oz., as did platinum (up US$25 per oz. to US$1,114 per oz.) and palladium (up US$14 to US4774 per oz.) — once again showing the de facto currency nature of the venerable precious metals group.

• The darker side of the U.S. dollar-gold price relationship surfaced in March in the gold mining industry’s biggest blow up so far this year: Allied Nevada Gold seeking bankruptcy protection, as it faces a major cash crunch at its large-scale, low-grade and ultimately unprofitable Hycroft gold-silver mine in Nevada.

Allied’s crash and burn is emblematic of the pressure U.S. miners face compared to their competitors in commodity-exporting countries such as Canada, Australia, Peru and South Africa, where tumbling local currencies have softened the blow and reduced salary and wage-related cash costs over the past nine months.

• If the wild life of former Brazilian mining and oil and gas mogul Eike Batista ever becomes a Hollywood movie, a few events this month have generated more crazy scenes.

Batista’s net worth was US$35 billion a few years ago but is now in negative territory by a billion or so, after his vast, interlinked commodity empire collapsed when his offshore oil prospects turned out to be much smaller than touted.

Batista had recently started an insider-trading trial in Brazil when the judge presiding over the trial, Flavio Roberto de Souza, was removed after he was seen riding around in Batista’s Porshe — which had been seized by the government — and was storing the car at his residence, rather than a government seizure lot.

At press time, the judge is under investigation for embezzlement, money laundering and fraud, after admitting in a statement to embezzling $265,000 in drug money.