Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
The Beatings Will Continue Until the Economy Improves - 6th Jul 20
The Corona Economic Depression Is Here - 6th Jul 20
Stock Market Short-term Peaking - 6th Jul 20
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20
U.S. Long Bond: Let's Review the "Upward Point of Exhaustion" - 27th Jun 20
Gold, Copper and Silver are Must-own Metals - 27th Jun 20
Why People Have Always Held Gold - 27th Jun 20
Crude Oil Price Meets Key Resistance - 27th Jun 20
INTEL x86 Chip Giant Stock Targets Artificial Intelligence and Quantum Computing for 2020's Growth - 25th Jun 20
Gold’s Long-term Turning Point is Here - 25th Jun 20
Hainan’s ASEAN Future and Dark Clouds Over Hong Kong - 25th Jun 20
Silver Price Trend Analysis - 24th Jun 20
A Stealth Stocks Double Dip or Bear Market Has Started - 24th Jun 20
Trillion-dollar US infrastructure plan will draw in plenty of metal - 24th Jun 20
WARNING: The U.S. Banking System ISN’T as Strong as Advertised - 24th Jun 20
All That Glitters When the World Jitters is Probably Gold - 24th Jun 20
Making Sense of Crude Oil Price Narrow Trading Range - 23rd Jun 20
Elon Musk Mocks Nikola Motors as “Dumb.” Is He Right? - 23rd Jun 20
MICROSOFT Transforming from PC Software to Cloud Services AI, Deep Learning Giant - 23rd Jun 20
Stock Market Decline Resumes - 22nd Jun 20
Excellent Silver Seasonal Buying Opportunity Lies Directly Ahead - 22nd Jun 20
Where is the US Dollar trend headed ? - 22nd Jun 20
Most Shoppers have Stopped Following Supermarket Arrows, is Coughing the New Racism? - 22nd Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Will The Fed Hike In December & What Does This Mean For Gold Prices?

Commodities / Gold and Silver 2015 Nov 02, 2015 - 02:01 PM GMT

By: Bob_Kirtley


The October statement from the Fed made one thing very clear; December is a live meeting and Fed is ready to hike rates if it sees fit. Yellen was more hawkish than the market was expecting, sending gold prices lower and bond yields higher. The critical focal point from here will be if the Fed’s hawkish stance will be validated by the upcoming economic data, most importantly the two employment releases we get between now and the December FOMC.

Employment data had been solid for the last few years, indeed the Fed shifted its focus from employment to inflation, reflecting that their mandate of achieving full employment was nearly accomplished. However the last two prints of +136k and +142k have put a spanner in the works. Are these one off points like the +119k we got earlier this year? Or is this a change in the health of the economy which could see the first rate hike delayed?

As mentioned above, we read the statement as a clear attempt by the Fed to keep a December hike on the table. Given that market pricing had been leaning towards only a 20-30% chance of a December hike following the NFP data, if the Fed had been any less hawkish they would likely have pushed December out of consideration. Since this is the first hike in such a long time, and part of unwinding the biggest easing of monetary policy the world has ever seen, the Fed would likely be hesitant to raise rates with very low market implied probabilities of policy action. The market is now pricing much closer to a 50% chance of a December hike, giving the Fed flexibility to raise rates if they wish. If the markets are still only pricing 20-30%, the Fed would likely not hike for fear of causing instability.

50% is probably fair pricing for December, given the uncertainty over data. If the next two payrolls figures are solid (+200k), the Fed will increase rates in December. If they are weak (+100K) then the Fed will delay hiking, and rightly so, as they will be cautious and concerned that the employment market is seriously softening. Those are the two easy solutions, but the grey area will come if the employment prints are mediocre.

What If Data Prints Grey

If the data is simply average from now until December, in our view the Fed will hike rates. Our reasoning for this is due to creditability and stability.

On credibility, the Fed has been saying all year that they plan the raise interest rates in 2015. Every dot plot has shown this, and the Fed has delayed and delayed again for a number of reasons over the past few years. In the absence of a smoking gun reason not to hike, the Fed would lose credibility if they remained on hold. The market would doubt that the Fed will ever be able to get off zero. Even if the Fed stressed that they could hike in early 2016, the market would not believe it.

On stability, the Fed would prefer a meeting with a press conference and projection materials to deliver their first hike. December is such a meeting, but January is simply a statement with the next press conference being in March. Whilst Yellen has stated that they could hold an impromptu press conference, it is highly unlikely that after a record time on zero, the first hike would be delivered with an impromptu tone. This would risk causing unnecessary volatility in markets. In addition to this January meeting on the 27th would only give the Fed a minor amount of additional data compared to December, for example there is just one more employment print between the meetings.

Therefore if the Fed does not go in December, they will have to wait until March to hike. That could be too long. In our view, if Fed is this close to hiking, then they are best to execute the first hike in December, with minimal surprise to markets.

Fed speakers between now and the December meeting will be key. The Fed will want to ensure the market is fully prepared. Therefore expect pricing to drift towards 75% if the data is solid, encouraged by hawkish Fed speakers.

What does this all mean for gold?

The simple answer is that a hike is bearish for gold prices, as it will reduce the need to hold gold as a financial asset and the USD strength resulting from a hike will see gold fall in USD terms. To demonstrate this the chart below shows the price of the front Eurodollar futures contract (Currently December) and gold prices. The futures price is quoted as 100 minus the 3mth Libor rate. Therefore a lower price means a higher expected 3mth yield. So as the chance of a Fed hike increases, the Eurodollar price falls. It is clear that generally gold has been falling and rising with the Eurodollar price, indicating its sensitivity to Fed policy.

If market pricing increases past 50% and towards 75% as we expect it to, as a result of solid employment data and Fed speakers talking up the chance of a December hike, the Eurodollar price will fall to new lows. Therefore we would expect gold to also fall to fresh lows.

Technically on the downside $1125 is the next support, and should that break we would expect gold to fall swiftly towards $1080. A catalyst will be needed for this to break and that catalyst will likely be the NFP data this Friday.

Trading Gold on the First Rate
We currently have short position in gold, via a few different option strategies. However we are not aggressively short the yellow metal here, and have not been since the start of 2013, when we turned our long term bullish stance to a bearish one, reflecting that the easing of monetary policy in the US had come to an end.

The reason we are not aggressively short gold at this stage is due to the data risk. Monetary policy and therefore gold prices are massively leveraged to the next few data prints. Employment data is a lottery and therefore having too large a position is similar to taking a coin flip. That is not a prudent way to manage capital and take risk.

Our current position will lose us a small amount of money if we are wrong, but could pay off considerably should we be correct. If this payrolls print is strong, we will add to gold shorts. Any kind of positive backward revisions would see us shorting gold aggressively with $1030 (the pre QE2 resistance that is now a major support level), as an initial target.

Holders of gold mining stocks are unfortunately in for yet more of the same under this scenario. Whilst we are without a position in gold stocks at present, we are looking for opportunities to establish short positions. Despite October being the best month since 2009 for equities, gold stocks barely outperformed the S&P 500, even though gold gained 2.25% over the month. We are concerned that a pullback in stocks, combined will a fall in gold prices in a December hike situation would see gold stocks fall to yet another low, even though the HUI index is already down 25% in 2015.

For now the next stop is this US Employment data this Friday. Following that we will reassess the situation, but as things stand a December hike by the Fed is more likely than not, which is bearish for gold prices in the short term. To view our full trading record and find out more about subscribing to SK OptionTrader please visit

Go gently.

Bob Kirtley

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. Winners of the GoldDrivers Stock Picking Competition 200

DISCLAIMER : Gold Prices makes no guarantee or warranty on the accuracy or completeness of the data provided on this site. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This website represents our views and nothing more than that. Always consult your registered advisor to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this website. We may or may not hold a position in these securities at any given time and reserve the right to buy and sell as we think fit.

Bob Kirtley Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules