Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Government Shutdown Ends – Markets Ignore Looming Debt and Bond Market Threat - 23rd Jan 18
Stock Risks to Watch: Choose Your Bear Market Dashboard - 23rd Jan 18
Worse than Watergate - Release the Memo - Investigate Uranium One - 23rd Jan 18
CAT Stock Bouncing after JPM Upgrade How High and How Long Can This CAT Jump? - 23rd Jan 18
Why Banks Will Be Slammed In The Next Crisis—And That May Be Good News - 23rd Jan 18
Medicare Premiums Are A Shared Pool - Coming Changes That Will Transform Retirement - 23rd Jan 18
Charged Atmosphere of Heavy Police and Security Presence at Sheffield Street Tree Felling Protests - 23rd Jan 18
Pension Crisis And Deficit of £2.6 Billion At Carillion To Impact UK - 22nd Jan 18
Two Factors for Gold That You Don’t Want to Miss - 22nd Jan 18
Why You Must Own Silver in 2018 - 22nd Jan 18
This Could Be The Hottest Mining Stock Of 2018 - 22nd Jan 18
Stock Index Trend Trade Setups for the SP500 & NASDAQ - 22nd Jan 18
Stock Market Deceleration / Distribution - 22nd Jan 18
US Markets vs Govt Shutdown: Stock Markets at all time highs - 22nd Jan 18
Land Rover Discovery Sport - 1 Month Driving Test Review - 22nd Jan 18
Why should you use high-quality YouTube to mp3 converter? - 22nd Jan 18
Silver As Strategic Metal: Why Its Price Will Soar - 21st Jan 18
Stocks, Gold and Interest Rates Three Amigos Ride On - 21st Jan 18
Why Sometimes, "Beating the S&P 500" Isn't Good Enough - 21st Jan 18
Bunnies and Geckos of Sheffield Street Tree Fellings Protests Explained - 21st Jan 18
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

Will Lower Crude Oil Prices Cause the Fed to Delay Tightening?

Commodities / Crude Oil Dec 15, 2015 - 11:54 AM GMT

By: Bob_Kirtley

Commodities

The FOMC has been moving towards the beginning of a new tightening cycle for a considerable amount of time. Throughout this year Fed statements and the accompanying press conferences have been preparing the markets for the first rate hike. Since the October FOMC various Fed speakers have signalled to the market that the first hike would come at the December meeting, which is this week.


Prior to 2015 employment had been the key focus for the Fed. Consistent jobs growth had allowed the tapering of QE3 and appeared to be paving the way for higher rates this year. However, inflationary pressures fell, causing the Fed to delay the first rate hike until now. They key reason for the decline in inflationary pressures has been the massive selloff in oil, which broke to new lows last week.

We believe the most likely outcome of this week's Fed meeting is a rate hike accompanied by an overall hawkish tone. However, the risk of a delay has significantly increased with the break in oil prices. The purpose of this article is to discuss how and why those risks have risen, and how to trade now that the risk reward dynamics have changed.

The Negative Effects of Lower Oil Prices

When oil prices first began to fall there was speculation that this decline would be positive for the US economy. Lower oil prices would mean smaller operating costs for firms and more discretionary income for households. This would lead to higher profits and increased spending, which would drive economic growth.

However, this argument was without respect for the US oil industry, and in particular the new high costs shale projects. Lower oil prices reduce profit margins for already operating oil producers while also making new shale oil projects too expensive to action. This means fewer jobs in the US, either by way of layoffs or lack of necessity with shale ventures being axed. This brings us to the multiplier effect, which is crucial when considering the impact of lower oil on the economy. We discussed this in depth in a market update sent to our subscribers last year:

“…if an energy worker losses a job, they may not buy the new house they were looking at, which would have involved a mortgage and credit. This means that the impact of a job loss is a lot more than just the salary as they employee may forego future spending with borrowed funds. Therefore, the multiplier impact has the potential to have an overall negative effect on the economy even in net oil importing countries, such as the US."

This means that although more people may feel the benefit of lower oil prices, the overall effect has the potential to be heavily detrimental to the US economy. This means that there is a sizeably increased risk that the Fed may delay the tightening cycle.

Can The Fed Delay Tightening?

The Fed has signalled a hike is coming this week and markets have largely priced this in. This makes it highly likely that Yellen will announce the first rate hike on Wednesday. However, this does not rule out that the Fed can still delay the tightening cycle as this is a process that will likely cover a number of years.

The tightening cycle can be delayed this week, even with a rate hike, by the language used and dot projections released. These will show the Fed’s plan for the future of monetary policy after the first hike, and thus will signal how the tightening cycle is likely to play out. If the dot projections are flatter than expected, this means that there will be less hikes next year and that rates will rise at a slower pace. This is a delay in the tightening cycle.

Last week’s break to the downside in oil reopens the risks to the economy that were prevalent during the initial decline. In response to this the Fed may believe it is prudent to delay the tightening cycle in the manner discussed above. This would calm market fears, shown by the fall in bonds, that both lower oil prices and a less accommodative monetary policy may harm economic health.

In the past Yellen has described lower oil prices as being transitory, and not the reason for a delay in rate hikes. However, the lack of inflationary pressures has been a key reason for the Fed not hiking sooner. The most significant hamper of these pressures has been lower oil, which has both directly lowered headline inflation and has had a negative impact via the flow on effects of fewer jobs. Therefore the break in oil may cause a delay without being explicitly stated as the reason.

Trading Gold’s New Risk Reward Dynamics

The yellow metal is struggling to make new lows with bond prices remaining firm. The Fed meeting this week will determine where bonds go from here, and will therefore move gold prices also. We expect the Fed to hike, but this is already largely priced in so its announcement is unlikely to move bond prices. Therefore the tone of the meeting and dot projections will be key, which the break in oil has increased the risk around.

If the Fed signals that more rate hikes will come and come often next year bond prices and gold will fall sharply. However, if the tone and dots are more dovish as a result of last week’s break in oil, then gold and bond prices are less likely to decline heavily.

We believe that the most likely outcome of this week’s Fed meeting will be a rate hike accompanied by hawkish tones for the future, but we respect that the risk of increased dovishness has risen. The long term direction of the Fed remains hawkish with rates still likely to rise going forward. This will still have a bearish effect on gold prices, so we remain bearish over the long term.

Given our bearish bias, we will look to use the break in oil to gain entry to gold shorts at a better level, with the view to fade gold above $1120 via various options strategies. Prior to the break, we intended to simply add to our gold shorts on any strength in the metal. These trades would then perform as a hawkish Fed drove gold to new lows.

However, now that the risk of a more dovish Fed has increased, the risk of gold rallying after this week’s meeting has risen. Therefore it is a better trade to keep powder try until after the Fed meeting. This allows for gold to rally on the back of a dovish Fed, and thus a better entry point for any new shorts.

We may also look to tactically reduce exposure to gold ahead of the Fed meeting. Gold has the potential to break lower towards the next major support of $1030 on speculation that the Fed will be hawkish. However, this does not change there is an elevated risk of the Fed being dovish. In this case we would look to tactically reduce our exposure by banking the profits currently showing on a number of our gold shorts.

Our analysis of this week’s Fed meeting and the exact details of any trades we make will be issued immediately to our subscribers. Therefore if you want to know what gold trades we will be making in response to this week’s FOMC meeting, then please subscribe below.

Sam Kirtley

Email:bob@gold-prices.biz

URL: www.silver-prices.net
URL: www.skoptionstrading.com

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:  www.gold-prices.biz   makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is neither a guide nor guarantee of future success.

Sam Kirtley Archive

© 2005-2018 http://www.MarketOracle.co.uk - 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