Gold is trading modestly higher as the Fed begins its two-day FOMC meeting. The yellow metal remains narrowly confined in the lower half of the range established on Friday after the much better than expected jobs report.

The Fed is widely expected to hold steady when they announce policy on Wednesday, but last week's NFP print prompted some trimming of expectations for further rate cuts in 2020. It remains to be seen whether those data will illicit more hawkish guidance from the FOMC.

A more hawkish tone from the Fed may spark a further recovery in U.S. yields and the dollar. That, in turn, would likely weigh on gold. Unless escalating trade tensions and U.S. political risks offset those pressures.

That being said, I don't think the Fed will turn overly hawkish on the basis of that one NFP print, particularly in light of ongoing liquidity issues in the repo market. Bond market expert Mohamed El-Erian contends that the "spike in the repo rate come as a surprise to the New York Fed.

"It hasn’t proven to be temporary. It hasn’t proved to be reversible without massive injections of liquidity. Which means that structural issues are playing a role.” – Bloomberg Opinion columnist and chief economic adviser at Allianz SE Mohamed A. El-Erian

So the Fed was caught off-guard by the surge in the repo rate in September and has been reactive rather than proactive ever since. I doubt they'll do anything suggestive of tighter policy until the repo market normalizes.

Power issues in South Africa are providing some limited additional support for gold and a more substantial tailwind for platinum today. The state-owned power utility reportedly cut 6,000 megawatts of power from the grid today, resulting in rolling blackouts that shut down mining operations.

While gold may be garnering some support, platinum surged 3% to new three-week highs. Arguably, platinum should be playing some catch-up with the soaring palladium market as substitution becomes increasingly attractive. However, regulatory uncertainty surrounding emissions has seemingly made auto manufacturers reluctant to make the necessary investments to substitute platinum for palladium.


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