Gold And Fed Rate Hikes: There is an old saying among traders: "buy the rumour, sell the fact."
This relates to the idea that markets are forward thinking and price in events before they occur. Then once the "rumor" becomes reality, the market reverses as the news has already been built into the market price.
The gold market has been expecting, bracing for and pricing in Fed rate hikes for months now. Has the gold market been "selling the rumor?"
Some analysts might argue that the gold market began pricing in the expectation for higher U.S. interest rates last summer.
In July 2014, the U.S. dollar index began its rally in earnest, in part due to expectations for Federal Reserve interest rate hikes. From July 2014 to the recent peak at March 2015, the dollar index rallied from 79.74 to 100.39. During that similar time period, nearby Comex gold futures fell from $1,343 per ounce to a low at $1,133 per ounce before rebounding to the $1,181 area where it is trading now.
All eyes will be focused on the upcoming Federal Open Market Committee (FOMC) meeting on June 16-17, which is followed by a press conference. It is largely expected that Fed Chair Janet Yellen will use the press conference to lay the groundwork for a September rate hike.
"Continued progress in the labor market has kept the Fed on track to raise rates at the September FOMC meeting, which is our call. Next week’s updated FOMC policy statement, economic outlook and press briefing will likely go a long way to increase/decrease the level of market confidence to that anticipated September rate hike expectation," wrote Sam Bullard, managing director & senior economist and Wells Fargo Securities, LLC in a research note to clients.
Fed rate hikes are not new news for the gold market. Traders have been bracing for this and pricing in expectations for months. In the meantime, other longer-term players continue to accumulate gold at the relatively lower prices levels seen in recent months. Global central bank gold purchases were again active in April.
In April, a total of 10.7 tonnes of gold were purchased by global central banks, according to the World Gold Council. The Russian central bank continues to be a major buyer. Capital Economics has an end of 2015 forecast for gold at $1,400 per ounce, as the firm expects official purchases to be a factor supporting gold prices over the next year or two.
As the first Fed rate hike gets closer and closer, gold traders may be well served in remembering the old market adage. Has the gold market been "selling the rumor" and could traders ultimately "buy the fact" once a Fed rate hike actually does emerge?
Only time will tell.
By Kira Brecht, |
