FED Statement Bullish for Gold Price

We have long held the view that the FED would not raise rates by any significant amount in 2015. Rather than exit our mining stock positions, we have accumulated on the dips with the belief that investors were overly-confident about the prospects of a major rate increase in 2015 and mistaken to buy the USD and sell gold.

Marc Faber, Peter Schiff, and others have now come out publicly doubting that the FED will be able to raise rates and even forecasting that the FED may announce QE4 at some point in the near future. ZeroHedge published an interesting article arguing that the FED can't hike rates by even .25%, given the leverage within the fixed income asset space.

Despite the fact that the FED statement dropped the word "patient" in relation to raising interest rates, the dollar still crashed and precious metals spiked higher on Wednesday. This is because Yellen clarified that removing the term patient does not mean the Fed is impatient. To the contrary, the FED plans to remain “highly accommodative” even after the first rate hike occurs.

One of the biggest changes was the forecasted pace of rate increases, which slowed considerably. 2015 was revised lower, suggesting rate increases would be smaller and come later than expected. But the biggest change came to 2016 in particular, as the 2.25%-4.0% forecasts were revised lower to 1.5% to 2%. The bottom line is that rates are not shooting higher anytime soon, as the economic recovery remains too fragile to digest such a move and inflation remains well below the FED's target.

The market is just beginning to realize that the FED isn't going to jack up rates anytime soon. Therefore, the USD had been bid up too high and precious metals sold off too sharply given this new realization. This is why the USD tanked on Wednesday and precious metals rocketed higher.

I believe the FED will continue walking back expectations of major rate hikes in future statements and that such actions will be supportive of gold and silver prices. Even with the move higher over the past few days, precious metals are still oversold and undervalued in my estimation. Expectations of interest rates spiking higher in 2015 remain incorrectly priced into gold and silver. As the probability of such action decreases, the prices for gold, silver and mining stocks should increase substantially. 

The technical chart confirms our bullish outlook. Critical support held up and the gold price managed to establish a ‘higher low’ of $1,148 in March, above the November low of $1,143. Furthermore, the RSI has bounced off oversold levels, is pointing higher and has plenty of room to run. 

The bottom line is that the upside potential for gold far outpaces the downside risk. With the newfound realization in the markets that the FED will not be pushing interest rates much higher anytime soon, we are likely to see a new rally in precious metals over the next few months. Extending this forecast, I believe that we will see gold break out above $1,500 and silver climb back above $20 before the end of the year. Best-in-breed mining stocks that have utilized this corrective phase to increase production, improve efficiencies, reduce costs and acquire assets at fire sale prices are going to benefit tremendously. I believe that a strategy of accumulating both the physical metals and quality mining stocks in tranches during the current correction will be richly rewarded over the next 12-24 months.

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Jason Hamlin

Founder - Gold Stock Bull