It’s the same old story.
But it’s the only story in town that matters…
It revolves around the US Fed’s next move.
At the moment, the Fed Funds Futures market is pricing a 60% chance of a rate hike in December. But if you ask me, I’d say it’s more like 100%.
According to the Financial Times, Janet Yellen, Chair of the Federal Reserve, said on Wednesday night:
‘The US economy was performing well and that Fed rate-setters might consider raising rates at their meeting next month.
‘The “downside risks” to the US economy from global economic and financial developments had diminished since September, Ms Yellen said in a congressional hearing, reiterating the positive message the Fed projected after its October meeting.’
It appears that the Fed officials have woken up. Not only have they hit ‘reset’ on their (very poor) communications strategy. But they’re effectively telling us, ‘forget about everything that we’ve worried about in the past, we’re going to raise rates no matter what in December’.
Will this be another case of the boy that cried wolf?
The market seems to think so. It hasn’t seriously priced a December rate rise into share prices yet.
Trust me…you’ll know when it is being priced into financial markets.
A US Fed rate rise will impact gold
One sector that will take a big hit from a rate rise is gold. For nearly two years I have been telling Resource Speculator readers that gold will fall to US$931 per ounce or lower.
Now you may or may not follow gold stocks. But if you do, you may recall the recent jump we’ve seen.
Gold ran from a low of US$1,084.50 per ounce in late July to a high of US$1,191 per ounce last month. Many analysts were yelling that the ‘gold bear market was finally over’.
At the time, much of the excitement revolved around….you guessed it, the pending US Fed non-rate hike. On 13 October, when gold was trading at US$1,155 per ounce, I argued to Resource Speculator readers that it was still not time to buy gold. By all fundamental and technical accounts, nothing had really changed. Gold was just experiencing another relief rally in its long term bear market. To sum it up, I told readers:
‘If the Fed does raise rates later this month, the US dollar will jump significantly higher. Gold will get crunched, and so will stocks…
‘And if they don’t raise rates?
‘Well, that’s already priced into the market. Remember, the bond market’s only showing a 10% chance of a rate lift-off this month.’
This analysis proved to be correct. Gold is now trading lower at US$1,103 per ounce.
Last week, I updated Resource Speculator readers with my latest analysis on gold. In short, I explained how they should prepare for a lower gold price when the Fed raises rates in December. If you want to read the full analysis, you can learn more here.
Patience and discipline will pay off. It will be the December rate rise that sets in motion the final crash in gold.
If that’s not a good enough reason to sell your gold stocks, the looming stock market correction may pull you over the line…
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And a rate rise will also impact stocks
My colleague, over at Crisis & Opportunity, Greg Canavan explains it best. He wrote in The Markets and Money:
‘It’s a different story in the markets. Stocks tanked in August as investors worried about the effect of the first Fed rate hike in about a decade. That made the Fed worry too. So Yellen pulled her head in. She said the financial market turmoil was reason enough to hold off on rate rises.
‘That soothed the angry beast. Stocks rallied. All was good with the world.
‘But the Fed, not understanding the trap they have made for themselves, saw the rally as an easing of financial risks. This put a rate rise back on the table, possibly as soon as next month. Yellen told the financial world as much last night.
‘So I’m tipping you’ll see another bout of weakness in US markets, and by extension, weakness in Aussie stocks too. This could last up to a month. The Fed doesn’t meet again until mid-December, so unless the Fed does ANOTHER backflip on rates, the market will head into Christmas assuming a rate hike is a possibility.
Indeed, Greg is tipping for a pullback in the stock market.
This is because punters are addicted to cheap money. Just like what happened in August/ September, they will panic that the Fed will turn off the lights off at the party by raising rates. This will send the market lower purely because of fear. To understand what we’re looking at, check out the weekly chart of the Dow Jones below.
Source: Trading View; Resource Speculator
The chart above shows that the Dow Jones is currently trading at 17,867 points. While it’s trading above the green resistance line of 17,800 points, it hasn’t yet closed above this number on a weekly basis. For the Dow Jones to move higher, consecutive weekly closings above this number are crucial.
Nevertheless, with the December rate rise looming, it’s more likely that the Dow will correct below the red support trend line and move towards blue support this month. A break of the blue support line should see it head towards the 15,370 point target level before the December Fed meeting.
Especially since one of the world’s most followed technical indicators is the RSI stochastic oscillator. You can see it at the bottom of the chart. At the moment, pointed out by the circle, it shows that the Dow is extremely ‘overbought’. It’s exceeding the 80 ‘overbought’ level, trading above the upper purple region. Historically every time that this has happened, the Dow Jones has fallen to lower levels. Using arrows, I’ve pointed this out on the chart above.
Remember, the August/September correction happened in quick succession. Next time will be no different.
When this happens, commodity stocks will get crunched. In fact, it will be the start of the final and deepest phase in this resources bear market.
Resource Speculator readers are well aware of what will come next. They realise that if they don’t buy during this final bear phase, they’ll miss a once in a lifetime opportunity. If you want more information on how to best play these markets, and the sectors set to shine the most, check out Resource Speculator. You can start here.
Resources Analyst, Resource Speculator