The Fed's Rate Hike Weakens Gold And Boosts The Dollar

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Includes: AAAU, BAR, DGL, DGLD, DGP, DGZ, DZZ, GHS, GLD, GLDI, GLDM, GLDW, GLL, IAU, IAUF, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Bob Kirtley
Summary

The Fed rate hike boosts the US dollar and puts downward pressure on the precious metals.

The Fed's softer tone could see the US dollar weaken in the medium to longer term.

The financial markets have entered a bear phase, so those investors looking to rotate could now find the gold and silver space very attractive.

Preamble

At the FOMC meeting today, the Federal Reserve raised rates more or less as expected. The result was a boost for the US dollar and a fall in precious metals prices. Once again, we have a clear demonstration that the inverse relationship between the US dollar and gold is alive and well.

The second takeaway that we have is the rhetoric regarding the Fed's future plans on monetary policy. As we see it, the Fed's stance has softened as the number of rate hikes planned for 2019 was standing at three and this has been reduced to two.

Reading the text from the FOMC meeting, the rate hike can be summed up as follows:

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent.

If we assume that the aggressive tightening of monetary policy is now entering into a more passive phase, then the dollar's rally, in the long term, has probably come to an end. This being the case, a weakening dollar will be supportive of gold prices and thus herald in a brighter future for the precious metals sector.

As gold bugs, we must recognize that the world's central bankers play important role in determining the future of the markets, currencies, and the commodities sector.

It should also be noted that the Federal Reserve has changed direction albeit gently. This change we see as good for gold and our expectations of a new era for the whole of the precious metals sector is a lot higher than it has been for the last few years.

Charts of the US Dollar, S&P 500, and Gold

First up is the chart of the US dollar which depicts the difficulty it is having breaking through the resistance at the 97-level. We can also see that the Fed's rate hike helped the dollar to recover a little today.

http://gold-prices.squarespace.com/storage/USD%20Chart%2020%20Decmber%202018.jpg?__SQUARESPACE_CACHEVERSION=1545282119144

The chart of the S&P 500 depicts its sudden fall from grace in recent months suggesting that this bull run in stocks is coming to an end.

http://gold-prices.squarespace.com/storage/SP500%2020%20December%202018.jpg?__SQUARESPACE_CACHEVERSION=1545282250043

Finally, the chart for gold shows that it has been making steady progress against the US dollar despite today's setback of around $12.00/Oz.

http://gold-prices.squarespace.com/storage/Gold%20chart%2020%20December%202018.jpg?__SQUARESPACE_CACHEVERSION=1545282077902

The drivers behind the Fed's softening on monetary policy

The stock has been pummelled with the S&P 500 falling from 2900 to 2500, registering a loss of 400 points or 14% since October.

The recent jobs report showed 155,000 new jobs in November, which is lower than the 206,000 monthly average that had been reported in preceding months.

President Donald Trump on Monday urged the Fed to "take the victory," in his latest attempt to influence Jay Powell prior to deciding on more rate hikes. Pressure from the President should not be ignored even though the Fed is supposed to be politically neutral.

Lower energy costs due to a 34% slump in global crude prices. Brent crude is trading at around $56 per barrel, down from $85 per barrel in October.

The above are just some of the important factors that influence central banker's decision-making process. An easing of monetary policy going forward should be supportive of the precious metals sector as the attractiveness of the dollar fades; however, today, we now have a rate hike and gold has slipped and the dollar has improved.

Conclusion

We have been through a period of low interest rates and easy money which has created a number of bubbles in various asset classes. The Federal Reserve has recently implemented a strategy of 'normalization' of monetary policy via a series of rate hikes. The hikes are taking effect as a number of asset classes look to have peaked and appear to be rolling over. From crude oil, which has fallen back in dramatic fashion, to London property prices, which are softer than they were.

The US dollar has been doing well of late, but it has met with considerable resistance at the '97' level. Despite many attempts to vault this barrier, it hasn't got the legs to build on the gains and has been unable to hold this level. We expect it to struggle next year as the number of planned rate hikes has been reduced. However, the demise of the euro and the pound, due to the Brexit debacle, could add support to the dollar as it may be viewed as the best of the bunch. (The best-looking horse in the glue factory, as they say).

As an alternative investment, the precious metals sector, which has been beaten down over the last few years, could be the sector that appeals to those investors looking to rotate their funds into an up-and-coming sector.

In my very humble opinion, now is the time to finalize your selection of gold and silver stocks along with a well thought out options strategy in preparation for the next rally in this tiny sector.

Take great care before placing a trade as these are changeable times that will wrong-foot many of us.

Your time and comments are very much appreciated, so be sure to send them in.

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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.