Fed Rate Hike Causes Gold Price Drop

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By Keith Weiner

Rate Hike Heeded by Gold, Ignored by Stocks

The price action was not what most of those in the gold community hoped for (or predicted). The price of gold dropped another $24 and that of silver nearly a whole dollar.

Observing the stock market triggers all sort of reactions…

Cartoon by Bob Rich

The big news, of course, is that the Fed hiked rates another 25 basis points. So far, stock market speculators don't seem to care. They should.

The present value of all future earnings depends on the interest rate, and every upward tick is a substantial downward revision of earnings in out years.

However, the bull is so strongly entrenched that it may take a while for this to sink in. We also think of the companies which were borrowing to buy their own shares, and for that matter borrowing to pay dividends. At what interest rate do those types of trades stop?

Fundamental Developments

Are higher interest rates bad for gold and badder for silver? Are we close to capitulation in the metals? Readers of last week's Report know that we put the fundamental prices of gold and silver at $1,190 and just over $15. Where are they now after this week's action?

Below, we will give an update on those fundamental prices. But first, here's the graph of the metals' prices.

Prices of gold and silver

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It rose sharply this week.

Gold-silver ratio

For each metal, we will look at a graph of the basis and co-basis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and co-basis in red.

Here is the gold graph.

Gold basis and co-basis and the dollar price

Last week, we said the dollar was shooting the moon. It was then worth 26.8 milligrams gold. Now it is at 27.4, and we had to expand the graph to see the new height.

When speculators sell off their positions, the red co-basis line (i.e. scarcity of gold) moves with the dollar. That is not, however, what we saw this week. Gold became less scarce at $1,135 on Friday than it was at $1,159 a week ago.

That is the fact, and we call it as we see it. The fundamental price is still above the market, just under $1,160.

What makes this both exciting and challenging is that the price at which the metal would clear keeps moving, along with the speculators' effect on the quoted market price. This week, real metal came to market. This is what caused the price drop.

Now let's look at silver.

Silver basis and co-basis and the dollar price

In terms of silver, the dollar rose even more, from 1.85 to 1.94 grams. Unlike in gold, the silver co-basis did rise though not a lot.

And our calculated fundamental price moved up to $15.50.

Charts by: Monetary Metals