The Merriam-Webster Dictionary defines sentiment as “an attitude, thought, or judgment motivated by feeling: predilection. : a specific view or notion: opinion. : emotion. : refined feeling: delicate sensitivity, especially expressed in a work of art. : emotional idealism.
When it comes to financial markets, market sentiment is the view or attitude that creates our opinion as to whether an asset class is overvalued or undervalued. It shapes and changes the price value of a stock or commodity.
Market sentiment is overly sensitive to statements and comments from Federal Reserve officials, as these individuals have the power and influence to alter monetary policy. There is a dramatic difference between the perception of the Federal Reserve’s upcoming monetary policy changes and the actions of Federal Reserve officials.
The Federal Reserve has raised rates at every FOMC meeting this year except January, from March through November, for a total of six rate hikes. In the last four FOMC meetings (June, July, September and November), they have raised rates by 75 basis points. The aggressive nature of the Federal Reserve’s monetary policy caused gold to fall dramatically from March through early November. Gold traded at its highest value this year of $2078 in March. By early November, gold prices had fallen to around $1,621, driving prices down 21.99%.
During the first week of November, market sentiment changed because inflation rates had fallen slightly and investors viewed this fractional decline as a signal that the Federal Reserve would begin to ease its aggressive monetary policy. This sent gold up dramatically from $1,621 to an intraday high of $1,792 on Tuesday, November 15. Because the CPI index fell from 8.2% year-over-year in September to 7.7% year-over-year in October, investors thought the Federal Reserve would become more dovish on upcoming rate hikes.
However, Federal Reserve Governor Christopher Waller said at a conference in Sydney, Australia on Sunday, November 13: “We’re not slowing down…Stop paying attention to pace and start paying attention to where the endpoint will be. Until we get inflation down, that endpoint is always a way out.” On November 14, several Federal Reserve officials made comments to the contrary.
San Francisco Federal Reserve Chair Mary Daly said “it’s far from a victory.” Lorie Logan, Federal Reserve chairwoman at central bank Dallas, said last week’s report is “a welcome relief,” but it won’t alleviate the need for further rate hikes, possibly to a slower pace.
Statements made over the weekend and Monday November 14th dramatically changed market sentiment regarding gold prices. Gold prices hit an intraday high above $1790 the following day and then began having three straight days of price declines from Wednesday to Friday. To add fuel to the fire today, St. Louis Federal Reserve Chairman James Bullard said the Fed’s benchmark policy may need to rise as much as 7%.
The statements lifted the price of gold from Tuesday’s high to its current price. As of 4:27 p.m. EST, the most active December futures contract is currently set at $1751.30 after factoring in today’s net decline of $11.60. Statements will likely continue to create bear market sentiment for gold.
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