Posted 21st September 2016
Today’s a big day for gold.
At 7 o’clock this evening UK time, the Fed’s supposed to be putting us out of our misery. In other words, it’ll be telling us whether it’s raising rates… or not.
And its decision could catapult gold to new highs for the year… or send it crashing lower.
Of course, we have no way of knowing what the decision will be. There’s been so much smoke and mirrors from the Fed over the past six months that it could go either way.
Remember, on 15th December last year the Fed raised rates for the first time in almost 10 years and then signalled that it was likely to hike four more times through 2016.
But markets didn’t like it. The Dow fell about 11% over the next couple of months.
And given all the added anxiety in the markets at the time, about things like a slowdown in the Chinese economy and the Bank of Japan moving to negative rates, the Fed put the break on its plans to ‘normalise’ rates.
In other words, they set out to calm the markets – by scaling back the projected number of rate hikes in 2016 from four to just two.
It did the trick. Markets were soon taking out the pre-rate-hike-crash highs and continued upwards. The uptrend in stocks was back on.
And at the same time, gold and gold stocks have had a great year too. The uncertainty at the Fed – will it, won’t it raise rates? Is the economy weak or strong? – has supported precious metals prices.
Gold and silver are up 24% and 41% in 2016 so far, compared to ‘only’ 4.5% and 9.8% for the Dow and FTSE.
And there’s clearly no obvious outcome of the Fed decision later this evening. Yes, US stocks are trading near all-time highs. There has been some positive data in the first two quarters. The economy is not in a bad state.
But the Fed keeps delaying increasing rates. Why?
Jason Stevenson, a resource specialist in Melbourne, Australia, reckons it’s scared of what could happen…
“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.”
Well, we’ll find out in a couple of hours’ time. Yellen knows they have to raise rates at some point. But I can’t see it happening today (although one of my colleagues believes she will).
Business Insider reports that markets see the probability of a September rate hike as just 12%.
Yellen certainly doesn’t want to cause a stock market crash this close to the US elections. So she probably won’t move rates this week.
And judging by its price action today, that’s what gold’s predicting, too. It’s another sign of uncertainty – that’s good for old gold. And if the dollar sells off, then the gold price should go higher.
But probably what the market is really looking for are clues in the accompanying statement about what comes next. Is Yellen going to prepare the market for a rate hike later in the year – possibly in December, after the election? That’s a strong possibility.
Let’s wait and see what comes out.
For now, let’s have a quick look at the charts:
So we have that strong uptrend on gold, running from 17th December last year (just after the Fed last hiked rates) until now. You can see by the number of touchpoints I’ve circled on that line how important a trend line it is.
But since July, gold’s price has been consolidating in a sideways range, marked by those two blue trend lines. That’s gold biding its time… waiting to see what the Fed’s going to do.
You could call that a falling wedge.
That’s a bullish pattern. And typically, after the consolidation, you get a break to the upside and a continuation of the prevailing trend. But you need a decisive break and a close above the top trend line. (You can get caught by false breaks – where it pokes up above… only to reverse!)
If it does break out… well it can lead to a decent move. You can target about the same distance as the height of the highest part of the wedge. In this case, that puts it around $1,400:
And as a safety net, I guess you’d want to be out if it broke below $1,280.
This rate decision tonight could be pivotal, of course.
As we’ve seen, gold has started moving up today ahead of the Fed. And perhaps a hold decision will keep that move going, while a hike would surely see the gold price crash… possibly below $1,300 and lower towards those previous support/resistance levels at $1,280, $1,260, $1,240 and beyond.
I’m not trading this ahead of the Fed tonight – but I’m interested to see how it plays out. And I may come back to the idea if I spot the right set up.
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by Max Munroe
Posted March 14, 2013