Rate Hike Crossroads

on Nov 25, 2015

It has been a rough ride for precious metals over the last few weeks. Indeed, most if not all commodities have experienced back-to-back selling since the October Federal Reserve Open Market Committee announcement, which pointed to a December rate hike, and the strong October jobs report, which also fuelled the speculative case for tighter monetary policies.

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Last week the Federal Reserve published the minutes of that meeting, which were broadly seen as emphasising the markets anticipation that a rate rise is likely to take place in December. The prices of gold and silver, surprisingly, rose.

                In part it was simply a function of a slight fall in the US dollar against which Gold and silver are often held as a hedge. Commodities tend to trade inversely to the dollar, since as the greenback increases in value, it takes fewer dollars to buy the same amount of a fixed asset. The U.S. currency’s recent strength has contributed to commodities’ weakness.

                The minutes themselves appeared more shady than markets had been assuming, containing some of the usual dovish caution from some committee members. As a result, investor bets on a December rate rise actually fell slightly.


What could this mean?

This could all suggest that a rate rise is already ‘priced-in’ – and therefore there is a good chance gold and silver have either found a bottom whatever happens next month, or have very limited downside in the event of a rate hike. The hard reality of a rates increase


What if they don’t raise rates?

                With so much exuberance abounding that a rate hike is guaranteed, it begs the question why no one is talking about what happens if rates stay unchanged. The Fed themselves have not said it’s a done deal so what if they don’t?

                To leave rates unchanged would be good for commodities, not just gold and silver. The US dollar would weaken as markets who found their belief that a raise was assured crumble. A case of bought the rumour, sell the fact. The fed would lose credibility as investors would likely conclude that they had been bluffing all along, and that zero interest rate is likely for the foreseeable future. Undoubtedly, it would ignite a rally of enormous  potential in precious metals.



For technical investors, it could be time to apply the ‘be greedy when others fearful’ maxim as precious metals could bounce back over the short term ahead of next month’s meeting. Silver had dropped for 15 consecutive days [see Silver day chart below] and the technical’s are oversold on pretty much all time frames. A near identical situation is apparent in Gold as well. The relative strength index [RSI], and MACD, both technical momentum indicators, suggest they are oversold after the consecutive selling pressure. A retest of the August lows in the $13.90’s has pushed it further into oversold territory. Once oversold conditions form, the market would usually see conditions for a bounce.


The hard reality of a rates increase – if indeed it comes – will still be a hurdle for precious metals. Almost every Wall Street strategist has been expecting Gold below $1,000, the same voices who were calling for Gold to drop below $1,100 last year [Disclosure: it didnt]. Metals will likely continue to correct from extremely oversold conditions in the short term before preparing the face the Fed’s decision. Gold could come down then towards $1,000, Silver could test $13.75. The downside is extremely limited.


Whether they stay there for long, though, is another matter.


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Commodity Precious Metals