This week on Wednesday (06/13/2018), the Federal Reserve will gather for its once-per-six-week meeting on monetary and interest rate policy in the United States. We have demonstrated how since the first interest rate hike of the present cycle in December 2015. Where five out of six rate hikes have corresponded nearly perfectly with significant price lows for gold. The following chart shows the exact dates of all the prior Fed rate hikes and the corresponding gold price:
Wednesday Rate Hike Odds
The futures market continues to price in a high probability for a rate hike on Wednesday. It is now at a 91.3% odds of a quarter-point increase. Yet it is neither a confirming or negating indicator. So, we employ a separate prediction model which relies on US 3-month treasury bill yields as a leading signal. (below, green callouts). Note how 3-month yields have spiked above clearly established ranges 4 – 12 weeks. ( prior to each Fed rate hike since 2015).
What we observe once again over the past eight weeks is another spike in 3-month yields, which have now risen to a new multi-year high of 1.93% (far right, red callout).
[Side note: what we are observing is that the central bank is itself taking its direction from the US treasury market. US short-term bonds are selling off (thus spiking rates) weeks or months before the Fed decisions. The Fed is therefore not so much setting interest rate policy as much as it is mirroring the debt market. This supports the narrative that the Fed is a reactive, not a proactive institution.]
In sum, the above leading model suggests there is a substantial likelihood of a 7th interest rate hike at the upcoming Wednesday meeting, the decision for which will be released at 2 PM EST.
Gold Low on Fed Hike?
As we can see, since 2015, there has been only one interest rate hike that did not correspond with a significant low in the gold price: June 2017. At that hike, the Fed first introduced its new policy of “balance sheet normalization,” a euphemism for selling some of the nearly $3 trillion in bonds that it had purchased with freshly-created electronic money in the ten years following the 2008 credit crisis. The market took that June 2017 statement to mean that the Fed was set to notably tighten the money supply, which would in turn lower inflation. Gold fell for two more weeks, only to bottom in early July 2017 and abruptly reversed course as traders began to doubt the legitimacy of the Fed’s intentions. Following the initial sell-off, gold rose $160 over the next two months.
In sum then, every interest rate hike of the present cycle has seen an important gold low form either immediately on the day of the decision, or within two weeks following. And so once again we see gold stuck underneath the overhang of sellers who still exist between $1,302 – $1,307, just days before the next anticipated rate hike. Clearly, let’s say gold witnesses the same type of buying that it has over the past 2.5 years. Secondly, following each rate hike (arrows, above). It will be such will be sufficient to dislodge those sellers in the low $1,300’s and then see gold challenge 2016 highs near $1,378 again. Let us thus monitor the price action following this Wednesday’s Fed decision closely.
Takeaway on Gold Before the Fed Meeting
Gold is showing signs of wanting to stabilize. Yet, a clear overhang of sellers still exists in the low $1,300’s. Not considering this week’s Fed meeting, lower prices still fit within our model through mid-summer. Yet if the repeating pattern of strong buying occurs again. Especially following the predicted Fed interest rate hike. This may finally prove enough to dislodge those stubborn sellers for good. When the 2016 peak is finally exceeded for gold, a new price trajectory from the past two years of consolidation appears set to begin.
Bullion Exchanges Market Analyst
Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. This is where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.
This article is a third-party analysis. It does not necessarily match the views of the Bullion Exchanges. Readers should not consider it as financial advice in any way.