Gold At $1,300 After Fed Rate Hike? Not Impossible, Just Trickier

The fourth US rate hike of 2018 happened as anticipated on Wednesday, with the Federal Reserve announcing a quarter-point increase despite President Donald Trump tweeting that the central bank should not raise rates based on "meaningless numbers."

While a December rate adjustment has been priced in for months, what markets didn’t bet on was the Fed turning hawkish again on monetary policy for the coming year, after a spate of dovish-themed speeches lately by its governors, including Chairman Jerome Powell.

The central bank lowered its economic forecast for 2019 but still hinted that it would continue raising rates—only at a slower pace. Most Fed governors said they anticipated only two rate hikes next year, versus previous expectations for three.

In what appeared to be a nod to Trump’s call that it should “feel the market,” the Fed also said the timing and size of future rate adjustments "will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective."

The mixed messaging tripped up equity markets, with all three of Wall Street’s major indices falling on the Fed’s announcement and deepening their losses as Powell explained the decision in his news conference.

The Dow closed down 352 points, or 1.5 percent, wiping out an early rally of as much as 382 points. The S&P 500 also gave up 1.5 percent, while the NASDAQ Composite lost 2.2%. The slide continued in Asian equity markets on Thursday.

In the dollar’s case, it hit six-week lows even before the Fed announcement, on bets that the central bank would likely be dovish in its 2019 call. Just days earlier, the Dollar Index, measured against six major currencies, hit 19-month highs, demonstrating just how volatile things have been for the greenback ahead of the rate decision. Despite indications of more rate hikes, the index didn’t rebound on Wednesday.

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This posed a conundrum to gold market participants. Rarely have both stocks and the dollar fallen in sync after a Fed rate decision.

The lack of direction also pushed February gold futures on COMEX down, with the benchmark losing 0.6% in post-settlement trade. Earlier, it hit a six-month high of $1,262.10 per troy ounce.

Walter Pehowich, executive vice-president at Dillon Gage Metals in Addison, Texas, and a regular commentator on precious metals, summed it up:

“Wall Street gold traders are calling the reduction of just one rate hike next year ‘hawkish’ as they were expecting a pause in rates.”

He said the decline in equity prices, along with Treasury yields, showed “markets are not sure what this all means”.

But economists at TD Securities called the Fed “the least surprising central bank.” In a note entitled “The Fed Is Boring, Not Blind,” they said:

“If we look at G10 central bank decisions over the last 20 years, the Fed has the lowest propensity for delivering dovish surprises. In only 2.3% of rate decisions has the Fed surprised dovishly—less than half the G10 average.”

The economists added:

“So in light of some speculation that the Fed might or should take a pass today because of market volatility, history suggests the Fed has a high bar to surprise on the day, rather than pre-communicate. Doves may be slightly disappointed today, but if the Fed is going to be dovish, we think it is more likely in how they discuss the future, rather than pre-communicate.”

Technical analysts at Investing.com maintained a “Strong Buy” for COMEX gold in their daily outlook on Thursday, despite the previous day’s retreat and general market uncertainty. Level 3 “Classic Resistance”—the strongest barrier for February gold—stood at $1,274.80, paving the path for a $30 gain, or 2.5 percent climb, from current levels.

Some gold bugs were more optimistic though, expecting the yellow metal to stay with its recent upward trajectory and recapture the $1,300 levels last attained in June.

Mike Seery of Seery Futures in Plainfield, Illinois, described the volatility of the past month in gold as “very low,” considering that February futures were trading above their 20- and 100-Day Moving Averages. He added:

“Clearly, the trend is to the upside … as we continually grind higher on a weekly basis. I still think 1,300 could be in the cards relatively soon."

Written By: Investing.com