The Dove, The Dollar, and Gold

This was a most interesting week as members of the Federal Open Market Committee concluded their meeting on Wednesday. As expected, they announced the decision to raise their benchmark rates by 25 basis points. This was the first rate hike this year, the second rate hike in four months, and the third rate hike since the economic meltdown of 2008. In the weeks prior to this month’s FOMC meeting, Fed members made their intentions clear, transparent, and known.

As reported just prior to the meeting in MarketWatch, “It was with a palpable sense of urgency that Federal Reserve officials took to the airwaves two weeks ago, to make their intentions crystal clear. Everyone from Fed Chairwoman Janet Yellen to Vice Chairman Stanley Fischer to New York Fed President Bill Dudley to the normally dovish Governor Lael Brainard all but pre-announced an increase in its benchmark rate, to be formalized at the conclusion of its meeting on Wednesday.”

What was uncertain was the tone and stance of the Federal Reserve moving forward. Market participants wondered whether or not the Fed would take a more aggressive stance than originally anticipated. This idea was based upon the current strength of the American economy and the fact that the Fed had only raised rates three times since 2008. Many believed that the Fed might increase the number of rate hikes this year or implement a stealth rate hike. A stealth hike is a concerted reduction in the Fed balance sheet, which is currently at $4.5 trillion, the net effect being very similar to a rate hike.

The Dove Emerges

However Chairwoman Janet Yellen, in her post meeting statement, as well as answers to questions posed by reporters, made it clear that their intention and forecasts for upcoming rate increases were in line with previous statements. This indicated that the Fed would not wavier from their current plan for a total of three rate hikes this year. Her statements alleviated fears that the Fed was going to adopt a much more aggressive stance.

The Dollar Falls

In as much as post statement remarks put to rest fears of a much more aggressive stance by the Federal Reserve, it also put tremendous downside pressure on the US dollar. The US Dollar Index, which was trading at 101.80, on Tuesday of this week, immediately began to aggressively selloff, losing a little over a full percent on Wednesday as it closed at 100.70. Dollar selling continued on Thursday as well as today with the US Dollar Index closing at 100.29, losing roughly 1 ½% in value.

Gold Shines

A combination of a weaker US dollar, some buying, and massive short covering on Wednesday resulted in gold gaining about 1 ½% in value. The rally continued on Thursday and, although it has lost much of its momentum, continued today. The net result has been that gold has gained approximately 2 ½% in value this week, resulting in the largest weekly gain seen since the beginning of February.

On a technical basis, it is clear that the critical support level of $1200 per ounce held as traders pushed prices above normal resistance at 1221. This is now the current support level for gold. Our technical studies also indicate current resistance in gold is at 1231, with major resistance at 1265. It will be most interesting to see whether or not gold prices will continue to rise next week. If that is the case, it could indicate the beginning of a fairly substantial upside move in the precious yellow metal.

Wishing you as always, good trading,