The precious metals rallied in unison on Wednesday morning as the markets engaged in “position-evening” in order to be best positioned for the action when the FOMC decision comes out later in the afternoon. Thanks to this position-evening and short-covering in the trading markets, gold was more than 1.3% higher (+$14) to $1,076/oz. The surge pushes the next resistance levels to $1,080 and $1,084 per ounce.
Silver and platinum each jumped 2.5%, sending spot prices to $14.20/oz and $880/oz, respectively.
Global stocks were also solidly in the green on Wednesday.
Gold looks to decisively break out of its recent consolidation channel ahead of the rate hike announcement. Nervous short-sellers have been forced to cover their positions; continued bouts of short-covering may reveal that the gold market had stretched a bit too far into bear territory. Even as a net bearish position on the precious metals will remain in place for at least the next year, the fact that so many shorts are forced to cover their bets when the metals rally means that a slightly higher price range is likely justified going forward.
Any dovish statements following the Fed announcement, especially regarding the pace of future rate increases, would improve sentiment in the gold and silver markets. Moderate rate hikes also reduce the near-term hit to the opportunity cost of holding gold. Trading will probably be choppy throughout the morning and early afternoon as traders fidget until the FOMC decision is official.
All About That Pace
Despite dislocations in the forwards rates market (the spread with current near-zero rates is too wide), there is little reason to believe that the Fed will be aggressive in how quickly (and by what margin) it increases interest rates. There is no need to try and normalize rates especially quickly, considering that the economy is far from on fire and in need of cooling off (the typical rationale for raising rates under normal circumstances). The Fed does need to scoop up the extra money floating around the economy and trim its balance sheet, however, so beginning the normalization process now is important.
Moreover, with all of the brouhaha throughout 2015 over when the rate hike would come, even shallow rate increases of only a quarter-percent should have some impact on the financial system. At the same time, raising the federal funds target rate itself doesn’t necessarily ensure that Wall St and the broader private sector will follow. It is sensible for other interest rates to fall in line with the federal funds rate for overnight bank lending, but this pattern is driven by the free markets and not by decree from the Federal Reserve.
This means that the Fed must explore other tools to help adjust short-term rates to match its own rate hikes. Reverse repos and charging higher interest on the excess reserves that member banks allow the Fed to hold are two options. Cutting the central bank’s balance sheet will also be easier said than done. These more detailed aspects of how the rate hike process will play out will remain important developments to watch even after the fed begins hiking rates.
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.