Central Banks Setting The Tone As Gold And Silver Rise

Just ahead of the FOMC meeting that begins tomorrow, there is a bit of retrenchment, a small move toward safety, but nothing that indicates more than a bit of the jitters.

The Bank of Japan also meets tomorrow and there are some concerns that it may venture farther into negative rate territory, which would de facto create a relational rate hike against the yen for the basket other currencies.

To sum up the deeper analyses of both central banks’ potential moves, let’s consider first how the Fed will “introduce” a rate hike in December.

Assume that rates hold on Wednesday, after the meeting ends. The statement attached to that “hold” ought to be markedly more hawkish than those we have previously seen. If we get more of “this is slow and that is soft” but “signs are such and such that this has picked,” and “we need more data input,” etc., then we can immediately question even a December rate hike.

Japan is a bit more complicated. Negative rates have thus far not helped the stagnating country. So, many critics are saying, “Why extend and expand what has not worked so far?” Of course, that’s simplistic beyond words. Perhaps the initial rate reductions were simply too shallow. Perhaps Japan needs even deeper rate cuts plus something else, such as a trillion-dollar infrastructure/defense stimulus.

All the tension over rates has affected the dollar more than other currencies in the trading basket. The buck is down against the euro, yen and British pound. Currency traders must be pricing out a Japanese move deeper into negative rates, for the yen is the strongest money today.

The softer dollar is finally giving some support to gold and to a far lesser relative extent silver.

Gold is up about $3.00. Virtually all of that rise is due to greenback weakness. On the other hand, it was mostly regular trading that pushed silver up 2.00% on the day.

West Texas Intermediate and Brent North Sea at one point were up today about 2.00% but have since fallen back. Both oils settled up between 0.50% and 0.75% on the day. Brent has since fallen off to up only +0.35%.

We feel the oil price was “talked up” today by Venezuela, which has so mismanaged its historical natural resource advantages, they now are willing to say anything to get energy booming again.

Except via some sort of force majeure, there is still… read our lips… too much oil.

The three major U.S. equities indices moved back and forth between the red and green zones today, also paralyzed by the imminent meetings of two important central banks. The little positive sentiment today there is in stocks is based on the rise in oil prices. The Dow and the S&P 500 are up by a hair. NASDAQ, without an energy component, is in the red in mid-afternoon trading.

Keeping with the spirit of the day, the U.S. 10-year bond yield is virtually unchanged. The VIX is up mildly, no doubt on the mini-spike in oil, while the CME’s FedWatch tool shows the probability that rates will rise to be stuck at 12%.

Start gearing up for December. Wishing you as always, good trading,