GLD: Potential For Rally Hinges On The Fed

About: SPDR Gold Trust ETF (GLD), Includes: DIA, SLV, SPY, VXX
by: Income Generator

Market rallies continue to elude those invested in precious metals.

Federal Reserve holds the key to next year’s trends and this will be made clear in its next policy statement.

Potential rallies in GLD could be halted if monetary policy moves toward the hawkish direction -- but changes in the VIX could support.

When we look at the broader activity in the financial markets over the last two months, we can see that there is a sharp disconnect between the winners and the losers. If you are heavily invested in assets like the SPDR S&P 500 ETF (NYSEARCA:SPY) or the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), things are looking great heading into the holiday season. For precious metals investors, this has not been the case -- and many with sizable positions in the sector are looking for indicators to suggest that the declines are over.

Chart View: SPDR Gold Trust ETF (GLD)

Screenshot 2016-12-08 at 8.12.49 PM.png

Chart Source: Gold Traders

Of course, none of us can make these types of assertions with any real level of certainty but we can do is to isolate the events that are most likely to reverse trends and send valuations higher. The next in line on the docket can be seen in the Federal Reserve meeting that will be held on December 14th, where an interest rate increase in widely expected by most in the market.

Currently, the fact that one interest rate increase is largely priced into the equation has led many to downplay the significance of the outcome of the meeting -- but the reality is that nothing could be further from the truth. In the monetary policy statement that accompanies the rate decision, market investors will be given key clues with respect to the Fed's perception of strength or weakness within the broader economy. There have been several key indicators that actually suggest the possibility for additional rate increases that are not expected by the majority of the market.

And while higher interest rates are generally not considered to be a positive for GLD or the iShares Silver Trust ETF (NYSEARCA:SLV) this could be something that brings added volatility to the market in ways that force the exit of long positions in assets like SPY and DIA.

Chart View: US Unemployment Rate

Chart Source: Money Investors

In terms of the data, it would be surprising if the Fed did not choose to highlight recent strength in US labor markets. The national unemployment rate has fallen to a nine-year low at 4.6%, which is well below the 5% threshold that is frequently touted at the Fed. When we add to this the recent ISM non-manufacturing data, we can see an argument for a stronger policy outlook at the Federal Reserve.

The ISM data shows that the services sector is now at its highest levels since October of last year (57.2), and this is indicative of strong expansion in the dominant portion of the US economy (70% versus the 30% seen in the manufacturing sector).

Chart View: iPath S&P 500 VIX ST Futures ETN (VXX)

Screenshot 2016-12-07 at 9.46.17 PM.png

Chart Source: Gold Traders

Finally, it should be understood that any significant deviations in the Fed's policy tone could signal a widespread flight from stocks while market valuations are still holding at their record highs. The iPath S&P 500 VIX ST Futures ETN is currently trading at its lowest levels in recent memory, and any upturns in volatility would likely send a large portion of the market's investment money back into GLD and other precious metals assets. Given the current state of the market, this could be enough to override the potential negatives that are created by the possibility of higher interest rates.

This is not an outcome that falls in line with the conventional wisdom, so these are clearly factors that precious metals investors should be watching in the weeks ahead.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.