In early-November of last year we predicted that a
tradable gold rally would begin near the mid-December FOMC Meeting as long as
the Fed did what almost everyone was expecting and implemented its first rate
hike in more than 8 years. Our reasoning was explained as follows in the 4th
November Interim Update:
“Looking beyond the knee-jerk reactions to the news
of the day, we see a gold market stuck in limbo. In this no-man’s land
between a definitively-bullish and a definitively-bearish fundamental
backdrop for gold, the US$ gold price works its way higher during periods
when it seems that the start of the Fed’s rate-hiking is being pushed out and
works its way lower during periods when it seems that the start of the Fed’s
rate-hiking is being brought forward.
To get out of this ‘limbo’ and into a situation where
a more substantial gold rally is probable, it appears that one of two things
will have to happen. Either the Fed will have to take the first step along
the rate-hiking path, or the economic/stock-market situation will have to
become bad enough that additional monetary easing will be the Fed’s obvious
next move. In other words, the Fed will have to stop vacillating and move one
way or the other.
Although counterintuitive, there are two good reasons
to expect that a Fed rate hike would usher-in a more bullish period for gold.
The first reason is that it would potentially be a “sell the rumour buy the
news” situation. We are referring to the fact that when a market sells off in
anticipation of ostensibly-bearish news, the arrival of the actual news will
often lead to a wave of short-covering and an upward price reversal. The
second and more interesting reason is that it would spark the realisation
that in the current circumstances a Fed rate hike does not entail monetary
tightening.”
As it turned out, the Fed went ahead and implemented its
first rate hike in mid-December and a strong upward trend in the gold price
got underway less than 48 hours later.
The reason for bringing this up isn’t to brag about
getting something right; it’s to point out that gold now appears to be stuck
in a similar situation to the one we described on 4th November. As was the
case back then, to ignite the next tradable gold rally it appears that the
Fed will have to stop vacillating. Either the Fed will have to take its
second step along the rate-hiking path or the economic/stock-market situation
will have to become bad enough that all thoughts of a 2016 rate hike are
wiped out.
(This post is an excerpt from a commentary published
at TSI late last week. Note that an explanation of why a hike in the Fed
Funds rate no longer entails monetary tightening can be found in a March-2015 post at the TSI blog.)
