Gold is steady this morning ahead of the Fed policy meeting, after dropping $15 Monday. Most markets are making their final positioning moves before tomorrow’s expected announcement of the first US interest rate hike in nine years.
We see first resistance for gold at $1,068, then $1,074. First support is seen at the overnight low of $1,058, the the December low of $1,046.
Spot gold is up marginally, gaining a bit over $2 in morning trading. Silver is also steady, with prices moving around the $13.75 mark.
Correlations Breaking Down
The dollar hit a low of 97.2 on the DXY index overnight, before climbing back into positive territory at the New York open. The greenback is still trading near a seven-week low, despite the general belief that we will see benchmark interest rates rise tomorrow.
Oil prices fell to near an 11-year low yesterday, and bargain hunters are moving in this morning to pull US crude futures up nearly 2%. The recent oil rout has been pulling all commodities, including gold, down with it.
The rallying oil price is giving the energy sector a breather, and allowing stocks to post moderate gains. Major indices are trading up around 1% in New York.
It is unusual to see oil, gold, and the dollar rising together. This points out the breakdown in normal market correlations ahead of the Fed ‘s interest rate decision tomorrow.
Consumer Prices Continue To Climb
Inflation readings according to the consumer price index (CPI) have been on the rise. Core CPI rose 0.2% month-on-month, the third consecutive month of gains. This measure has been accelerating since gaining 1.9% year-on-year in October and another strong showing in November. This means that annual core CPI (which ignores energy and food prices, among other things) is up 2.0% year-on-year, bringing the measure right in line with the Federal Reserve’s inflation target.
Deflationary forces continue to hold down the overall CPI reading, however. Overall CPI was flat month-on-month, dragged down by persistently lower oil prices.
Gold and the Rate Hike
According to the futures markets, the odds of a rate hike from the Fed tomorrow is right around 80%, it’s highest of the year. The Fed would certainly suffer a huge loss of credibility if it held off on raising rates; among economists, the likelihood of a rate hike is even more certain, with 97% of economists believing the Fed will indeed make its first increase to the target federal funds rate since 2006.
Despite the consensus of economists, this means that the markets are giving about a 1-in-5 (20%) chance that the Federal Reserve surprises us all on Wednesday by leaving rates unchanged. Moreover, most experts are calling for a 0.25% (25 basis point) increase to rates, but this is merely an assumption based on past moves by the Fed to normalize interest rates. If the rate hike turns out to be smaller (perhaps 1/8th of a percent, or 12.5 basis points) or doesn’t come at all, you can expect the gold price to skyrocket due to all the short-covering. A disappointingly small or non-existent rate increase would be very supportive for gold, and likely cause the dollar to tank.
If nothing else, removing doubt about what direction the Fed will move is going to take a certain amount of drag off of the metals prices.
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