Gold is up about 23.5% for the year. It also remains in an uptrend from January.
Yet, despite these positives, it hasn’t all been smooth sailing. Gold hit a fresh two-week low on Friday, and is floating near its August low.
The US Fed is to blame for the volatility. Fed members have given mixed signals on the upcoming interest rate decision.
Will the institution raise rates this week?
Having analysed the data over the weekend, I wouldn’t count on it. That could spark (yet) another gold rush in the weeks ahead.
Why the Fed wants to keep rates low
After raising rates in December, the US Fed back-flipped on its aggressive interest rate policy earlier in the year. At the time, the US stock market nosedived by about 10% and Chinese debt issues worried investors. The Japanese central bank also unexpectedly lowered interest rates into negative territory.
With plenty of uncertainty, the Fed became more cautious. Calming markets, it promised to raise rates only twice this year — rather than the originally planned four times.
Gold — and gold stocks — went through the roof!
Precious metals tend to deliver huge gains during periods of uncertainty.
Yet, despite the stock market recently hitting all-time highs, the Fed keeps delaying increasing rates. The last thing the Fed wants, especially so close to the presidential election, is to cause a stock market crash.
This ‘wait and see’ policy is causing a lot of uncertainty. It’s why gold stocks are trading at higher prices today.
In the end, the Fed probably won’t have much choice. The stock market could see a 20–30% correction, regardless of its future decisions.
Along with other central banks, the Fed has lost a lot of credibility. It refuses to lift rates, adjust its policy, or admit that it’s wrong. The market is becoming nervous about the ramifications of ‘lower for longer’ interest rates — a reason behind last week’s volatility.
The mainstream is starting to understand that low interest rates and money printing haven’t helped the real economy. Instead, the dual policy has supported an unsustainable financial system.
Higher rates should ‘pop’ the bubble sooner. It will become more expensive to service all the ‘cheap’ debt.
The next Fed decision — don’t expect much
Fed Chairperson Janet Yellen knows that something is wrong. Yet, despite insisting that higher interest rates are on the cards, she keeps holding back.
Expect nothing to change this week.
News.com.au reported on 15 September:
‘“The big picture is the Fed rate hike, which is going to be the biggest factor for gold, so in the short term markets will be looking at US data,” Natixis analyst Bernard Dahdah said.
‘“It’s all about the opportunity cost of holding gold. Higher interest rates make it more expensive to hold gold, which has zero yield.”
‘Markets are pricing in just a 15 per cent chance that the Fed will hike US interest rates during its September 20–21 meeting, according to CME FedWatch. Many now expect a rise in December after the US presidential election.’
The markets aren’t pricing in a rate increase for a number of reasons. Yellen certainly doesn’t want to cause a stock market crash, and will probably keep rates on hold this week. That alone should trigger a jump in the gold price.
Where to invest?
There’s more to the story…
The Fed desperately needs to increase rates to retain some credibility. Yellen knows this more than anyone else at the Fed, as her legacy is on the line. For this reason, expect a positive tone when the statement is released on Wednesday night. In my view, the Fed will start preparing us for a rate move later in the year.
I expect interest rates to go up in December. The Fed probably won’t move rates in November. It’s the US election month.
What does this mean?
Gold producers and developers could see some good gains in the weeks ahead, as they are extremely leveraged to the gold price.
Reviewing the story, I believe that speculative gold stocks offer the best opportunities today. Their share prices tend to be leveraged to exploration success, rather than the gold price. If they find high-grade gold, the share price should skyrocket. If the gold price goes higher, that’s an added bonus.
If you haven’t done so yet, I urge you to check out the speculative end of the market. Then you can focus on what matters most: the company’s fundamentals.
For Markets and Money