Gold Price Bounces on Short Covering

December 1st, 2015 by

gold marketSpot gold rose for the second straight day on Tuesday, inching higher on the first trading day of December. The biggest factor that is expected to have an effect on precious metal prices through the rest of the year is the all-but-decided rate hike from the Federal Reserve, which would come at the next FOMC meeting in mid-December.

After falling slightly overnight, the yellow metal bounced back into positive territory near $1,067/oz this morning.

Meanwhile, platinum and silver were both also modestly higher, while palladium fell into the red. Spot silver was still hovering near multiyear lows below $14.20/oz, though January futures for the metal pointed toward $13.80 per ounce. Platinum prices held at about $840/oz.

Pricing in the Fed Rate Hike

The majority of the downward pressure on gold can be explained by the rising expectations for a rate hike from the Federal Reserve and the resultant support for a stronger dollar that this move would generate. The dollar has remained near 99.9 on the DXY scale, meeting resistance above this level the few times it has popped above 100.0 recently.

balance of gold and dollarMuch talk has centered around the markets “pricing in” the rate hike, meaning that they are taking positions that would already account for the effects of such a policy change.

By most accounts, the high likelihood of a rate increase later this December was already priced in by most of the markets around mid-November. In fact, according to Fed Vice Chair Stanley Fischer, the central bank could confidently declare that it had “done everything to prepare markets” for the impact of the rate hike by the week before Thanksgiving.

Yet, traders continued to pile into short positions even after gold hit 5-and-½-year lows. This has driven net short positions on gold a bit too far, meaning the yellow metal may be ripe for a rebound in the short-term as they scramble to cover those shorts.

Politically Motivated Policy?

Some pundits—notably presidential candidate Donald J. Trump—have noted that potential that the Fed held off on raising interest rates as a favor to the Obama administration. The move might be seen as a way to make the economy look better than it truly is as the president leaves office.

yellen_smileWhile this political favoritism may extend to whomever receives the Democratic nomination in next year’s election (presumably, Hillary Rodham Clinton), there is also the potential for a rate hike “accident” that would be an economic and political boondoggle.

If such an accident befalls the next administration, it would be supportive of gold. In the nearer term, if the Fed somehow balks on raising interest rates in December, this could push gold back into the $1,200/oz range again before the year’s out.

For more insight (and rhetorical misdirection), Fed Chair Janet Yellen will be speaking to the Economic Club of Washington on Wednesday and testifying before the Senate Joint Economic Committee on Thursday.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.