Gold and US Stocks Retreat Following Interest Rate Hike Announcement

December 14, 2016 - 5:17pm

 by Gary Wagner

The Federal Reserve’s final FOMC meeting for 2016 concluded today. In a largely anticipated move, the Fed announced an interest rate hike of 25 basis points (.25%). This rate hike accompanied statements containing their new economic forecasts.

With this unanimous decision, Fed officials raised interest rates for the first time this year. They also laid out their current economic forecast. Of great interest was a more hawkish forward policy than originally anticipated.

US equities and gold had been trading quietly with little change just prior to the conclusion of today’s FOMC meeting. In fact, the Dow Jones Industrial Average came within 34 points of that elusive number 20,000, and gold had been trading unchanged to roughly $2 higher.

This knee-jerk reaction moved the Dow Jones Industrial Average down over 150 points on an intraday basis. This news also moved gold pricing sharply lower, trading off about $8 within the first hour of the FOMC meeting’s conclusion.

Whereas we saw prices slightly recover in US equities as they moved off their intraday low to close at 19792, a 118-point loss on the day, gold pricing did not recover from its initial abrupt reaction and continued to trade lower throughout the trading session. As of 4:00 Eastern Standard Time, gold is trading off $14 dollars at 1144.70.

Dot Plot: Three Dots Rather than Two

Although today’s interest rate hike was largely anticipated, and for the most part factored into current pricing, an unanticipated hawkish tone emerged from today’s meeting. It was announced that the Federal Reserve has raised their projection of interest rate hikes next year from two to three. This new policy moved US equities, gold, and bonds sharply lower.

Three Dots Move US dollar and Two Year Treasuries to Higher Ground

This more hawkish stance also sent the US dollar to new highs not seen since 2003, closing up over 1.1%. The US Dollar Index closed at 102.20. US two-year Treasuries also rose dramatically to close above highs not seen since 2009.

Inasmuch as a quarter percent rate hike was largely anticipated, and factored into current market pricing, the more hawkish tone created by a policy with three rate hikes next year rather than two was not. Although Janet Yellen made it clear in her press that the Fed’s, “policy remains accommodative,” and that this policy, “is not on a preset course,” the news of this more hawkish stance resulted in dramatically lower equities in gold prices, a dramatically higher US dollar, and higher two-year Treasury prices.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

Gold Forecast: Proper Action

Although we are currently flat, with no active trades in gold or silver, on today’s video report we will detail our current market assessment as well as our current trading strategy.

Gold Market Forecast

Now that the dust is settled, and the FOMC has concluded its final meeting of the year, we have a much clearer picture in terms of Fed policy next year. Based upon today’s interest rate hike of a quarter percent, and more importantly a more hawkish policy stating that we could get three rate hikes next year, we believe we will see continued downside pressure in gold and silver pricing.

However, at the same time we recognize that on January 20, when President-elect Trump is inaugurated, traders and investors will be able to judge implementation of policies and leadership style. This will replace the current optimism which is based on hope, with a much more realistic market sentiment based upon action.

Secondly, we have clearly noted that there is been a key distinction between gold and silver prices recently. It is quite evident that silver has had greater proportional upside moves, with a net result in a tightening of the gold silver ratio.

Based upon the facts stated above one strategy would be to buy silver and simultaneously sell gold, with the understanding that you would want to unravel that spread prior to the presidential inauguration on January 20 of next year. More to follow on the strategy over the next week or so. 

Trending Markets Forecast

US equities came within a fraction of reaching 20,000 on the Dow Jones industrial average. However predominant buying which had been the overall characteristics of US equities since the presidential election reversed. For the first time since the election was held last month we have seen a substantial drop in both the Dow Jones industrial average as well as the Standard & Poor’s 500.

The US dollar witnessed a dramatic resurgence and a return to higher pricing, exceeding recent highs, and moving back above 102 on the dollar index.

Crude oil gave back approximately 4% of gains witness over the last couple of weeks due to an OPEC agreement reached in Vienna by members as well as non-OPEC member nations. However production cuts alone did not stabilize bullish sentiment, as reports of increased supply surfaced the market reacted and traded lower.