Gold Sell Off On Fed Noise… “Interesting Times” To “Support Gold”

Gold prices in dollar terms came under renewed pressure today testing strong support at the $1,200/oz level. Gold dropped another 1% to near a 6 month low and is set for a second week of falls after the dollar soared again after Federal Reserve Chairwoman Janet Yellen suggested a U.S. interest-rate hike could come “relatively soon.”

Source: New York Federal Reserve for Fed Funds Rate, LBMA.org.uk for Gold (PM fix)

Yellen’s prepared comments to U.S. lawmakers yesterday sent gold in dollar terms to its lowest finish since June 2, at $1,216.90 an ounce. It is worth noting that gold’s weakness this week is very much a case of gold prices in dollar terms. Gold in euros has risen from €1,130/oz to €1,137/oz and is essentially flat in sterling pound terms. Gold has risen in Swiss francs, Japanese yen and Australian dollar terms.

Yellen did little to dispel expectations of an interest-rate hike as early as December. The prospect of higher interest rates is considered by less informed market participants to be negative for gold, ignoring the fact that gold prices tend to rise when interest rates rise as was seen in the 1970s and again from June 2003 to June 2007 when interest rates rose from 1% to 5.25% and gold rose from $346 to $651 per ounce (see table above).

Gold is vulnerable when there are positive real interest rates and we are a long way from that now. Indeed, gold tends to be vulnerable towards the end of an interest rate tightening cycle – not at the beginning.

As ever, it is best to ignore both the “all powerful” Fed noise and indeed the market noise regarding rising interest rates being negative for gold. This is clearly wrong as evidenced in the data. It is also the case that the interest rate-hike expectations of just 25 basis points from record lows were already reflected in the market prior to this week.

It is prudent to ignore the incorrect narrative and consensus of gold in much of the “echo chamber” of market “experts”.  The experts and “the market” have got most big calls – such as Brexit and Trump – very wrong in recent times.

As we told Marketwatch “gold will likely need a few days to base prior to moving higher again” given “the speed and scale of the recent sell off”.

“The election of Trump has not radically changed the positive fundamentals in the gold market – quite the opposite.

The risk of a Fed rate increase next month likely contributed to the fall and the dollar’s strength. We believe that should the Fed rise rates even 25 points, it will lead to risk aversion and falls in risk assets. This and the very uncertain state of the world – economically and geo-politically – bodes well for gold in 2017.

We are living in ‘interesting times’ and these interesting times should support gold.”

As long as central banks continue to debase their currencies by trying to inflate their way out of fragile economic growth and recessions through zero and negative interest rate policies and massive digital currency creation, gold should continue to build on the gains seen so far in 2016.

Today, interest rates remain close to zero not just in the U.S but in most major economies. There is no opportunity cost to owning the non-yielding gold. Indeed, with negative interest rates in many creditor nations, gold has a higher yield than many major currencies.

Gold’s safe haven asset attributes mean that it remains a vital diversification for investors internationally today.