Why Gold Could Bottom on or Close to Today's Rate Hike

With higher yields predicting higher price inflation and consumer confidence at a 2-year high, today's anticipated Fed rate hike could mark an intermediate bottom in gold

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Dec 14, 2016
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Oil has been on a tear, and gold may be next, especially once this week’s anticipated Federal Reserve rate hike is behind us.

Three notable things happened to the price of oil this week. First, a much forgotten gap that opened in late June 2015 is on the verge of finally being filled. See the red circle below.

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Second, as you can see from the same chart, the 50-week moving average is just now turning up for the first time since June 2014, just before the whole oil collapse mess began. Third, we have tentatively broken through resistance at $52.42, and are at the door of resistance at $54.24 established after the very first brief bounce post-2014 collapse.

The OPEC deal to cut oil production, while certainly being the catalyst for this move, speaks nothing of its magnitude. Only the amount of money available on the sidelines determines the magnitude of a move after a catalyst. The fact that oil can climb so quickly on what is essentially indeterminate news speaks volumes of the amount of money in the system waiting to fall on good deals. Why indeterminate? Because there is no way of knowing if a deal between OPEC and other oil exporters will actually be honored. Trusts like these sometimes tend to break apart when one member seeks an edge over other members. Funny how conspiring to raise the price of a commodity is illegal on a domestic scale but anticipated on an international one.

If there is enough money to bid up oil prices so fast, then there is enough money to bid up consumer prices as well. What has happened to bond prices since July is even more extreme than what has happened to oil since August. Oil is up 28% since Aug. 1, but interest rates on the 10-year are up an astonishing 84% since July 8. Even more extreme, interest rates on the five-year are up 106% since July 5. Naturally rising interest rates tend to precede higher price inflation. This is why the Federal Reserve mainly uses that tool to head off any unwanted consumer price gains, successfully or not.

The iShares Barclays 20+ Year Treasury Bond ETF (

TLT, Financial) is skirting new 52-week lows, and though interest rates continue to be at historic lows, servicing the national debt becomes impossible at some tipping point. With Donald Trump’s spending plans and bellicosity against Iran and China, there is little possibility of that debt coming down. With the higher likelihood of trade disputes with China with Trump at the helm and heavy protectionism of U.S. businesses at the expense of consumers, we have even more artificial stimulus to the price inflation equation.

Further evidence of bubbling price inflation is that consumer confidence has just hit a two-year high. Consumers are more willing to part with cash, which can only add further upward pressure on prices.

The only major predictor of price inflation we have not seen yet is a rising gold price. The latest correction in gold has timed itself almost perfectly with oil’s latest recovery, oil having bottomed Aug. 1 and gold having topped one day later on Aug. 2. This suggests that when the current oil rally takes a breather, gold could be the immediate beneficiary, especially once the anticipated Fed rate hike will be behind us.

Interestingly, the Fed rate hike decision will be announced only 18 and a half hours before the new CPI and Core CPI numbers are released on Thursday. While a rate hike is bearish for gold, all other things being equal, and the metal could take a knee-jerk fall on the announcement of a rate hike, keep in mind that all other things are never equal and that gold reached its famous 1980 $821 peak precisely when interest rates were at historic highs.

All together, the situation now is extremely complex. On the one hand, interest rates at the short end of the curve have already doubled since July. In the face of a manual rate hike by the Fed, they are poised to go even higher. Eighteen hours later we have the CPI, which, given stabilized oil prices, is set to jump. We could therefore see a knee-jerk move lower on a Fed rate hike, followed by a sharp move higher marking a gold bottom on the CPI numbers. And in the background we have naturally rising interest rates, which, if they continue, will make servicing what is nearly a $20 trillion debt harder and harder.

Certainly, if the Fed ever has to hike overnight rates significantly, the ability of Congress to spend money on much besides mandatory spending and debt service becomes severely hampered, as do Trump’s infrastructure plans and the U.S. dollar.

Disclosure: Author is long gold.

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