Fed’s Anticipated Rate Hikes Stir Market Dynamics, Pushing Gold Prices Downwards

The dominant market force this week has been a revision in anticipated policies from the Federal Reserve, indicating possible sustained interest rate hikes into 2024, impacting multiple asset classes, notably gold. The evolving expectations, stemming from remarks by FOMC representatives, have propelled gold prices distinctly downwards, with bond prices also experiencing a significant drop, resulting in the US Dollar reaching a peak not seen in ten months.

Minneapolis Fed President, Neel Kashkari, has prominently expressed concerns over whether the FOMC’s measures are sufficient to counteract inflation, causing speculation regarding potential extended adjustments in the Fed’s rate policy. Consequently, gold prices plunged below $1900/oz, stabilizing around $1860.

The decline in gold extended through Thursday, hitting a six-month low, although a temporary halt in the US Dollar’s ascent offered a brief support to gold prices, making them somewhat more attractive to foreign buyers. However, despite a modest recovery to nearly $1875/oz on Friday, gold seems poised to suffer another monthly loss. The market’s direction might gain more insights in the coming week with the unveiling of pivotal ISM data and the September Jobs report.

High interest rates can have multifaceted impacts on gold, the economy, stocks, and the US Dollar:

1. Gold:

• Negative Impact: Gold usually has an inverse relationship with interest rates. High interest rates increase the opportunity cost of holding non-yielding gold, making interest-bearing assets like bonds more attractive. As a result, gold prices tend to decline.
• Inflation Hedge: However, gold is often seen as a hedge against inflation, so if high interest rates are accompanied by high inflation, some investors might still opt for gold.

2. Economy:

• Credit Cost: Higher rates mean higher borrowing costs, which can lead to decreased consumer and business spending and investment, potentially slowing down economic growth.
• Inflation Control: High interest rates are typically used to combat inflation by decreasing demand and consumption.

3. Stocks:

• Valuation Impact: High interest rates can lead to lower stock valuations as they increase the discount rate used to value future cash flows. This makes stocks less attractive compared to fixed-income assets.
• Corporate Earnings: They can also impact corporate earnings negatively, as the cost of debt increases, potentially leading to lower stock prices.
• Sectoral Impact: However, the impact on stocks can be mixed and sector-dependent. For instance, financial sector stocks, like banks, might benefit from a higher interest rate environment due to better net interest margins.

4. US Dollar:

• Positive Impact: Higher interest rates generally lead to a stronger US Dollar as they offer better returns on dollar-denominated assets, attracting more foreign capital.
• Trade Balance: A stronger dollar can make US exports more expensive and imports cheaper, potentially affecting the trade balance.

Integration:

While each asset class and the economy are affected in distinct ways by high interest rates, there is also considerable interdependence. For example, a stronger US Dollar resulting from high interest rates can put additional downward pressure on gold prices. Additionally, the overall economic environment influenced by high interest rates will impact corporate earnings and, consequently, stock prices. Economic slowdown due to high interest rates can also lead to defensive investing, where investors might prefer safer assets like bonds over stocks.

Low interest rates also have a range of effects on gold, the economy, stocks, and the US Dollar:

1. Gold:

• Positive Impact: Lower interest rates reduce the opportunity cost of holding gold since gold doesn’t offer yield, and there’s less competition from interest-bearing assets like bonds. This can lead to an increase in gold prices.
• Safe Haven: Additionally, gold can serve as a safe-haven asset in uncertain economic environments, and low interest rates might sometimes reflect these uncertainties, further driving demand for gold.

2. Economy:

• Stimulate Spending: Lower rates reduce borrowing costs for consumers and businesses, making it cheaper to finance big purchases or projects. This can stimulate economic activity.
• Encourage Investment: Businesses are more likely to take on new projects or expand when financing costs are low, potentially leading to job creation and growth.
• Potential Risks: However, prolonged periods of low interest rates can lead to asset bubbles or an overheated economy. Additionally, if rates are too low for too long, it can limit the central bank’s ability to combat a recession since they have less room to cut rates further.

3. Stocks:

• Positive for Equities: Lower rates tend to be positive for the stock market. Cheaper borrowing costs can lead to higher corporate profits, and the lower yields in the bond market can make equities more attractive.
• Valuations: Stock valuations might be driven higher in a low-rate environment, especially if corporate earnings benefit from the stimulated economy.
• Sectoral Impact: Some sectors benefit more than others. For example, sectors like real estate might perform well due to lower mortgage rates, but financial institutions might face pressure on their net interest margins.

4. US Dollar:

• Negative Impact: Lower interest rates can result in a weaker US Dollar as returns on dollar-denominated assets decrease, making them less attractive to foreign investors.
• Trade Balance: A weaker dollar can make US exports cheaper and imports more expensive, potentially improving the trade balance.

Integration:

The interconnectedness of these elements means that changes in one can influence the others. For instance, a surge in gold prices driven by low interest rates might reflect broader economic concerns that also affect stock market dynamics. A weaker US Dollar due to low rates can make commodities, including gold, more affordable for foreign buyers, potentially driving up their prices. Similarly, the overall economic climate shaped by low interest rates influences corporate profitability and stock market movements.

Costco is selling out of gold bars

Costco, the renowned retail warehouse, is offering 1 ounce gold PAMP Suisse Lady Fortuna Veriscan bars for purchase, attracting substantial consumer interest. These bars, according to discussions on Reddit, were recently available for nearly $1,900, with the spot gold price at $1,876.56 an ounce. Costco’s CFO, Richard Galanti, highlighted the high demand, stating that the bars typically sell out within hours online, with a purchase limit of two per member.

The availability of gold bars aligns with Costco’s increased offering of survivalist goods and seems to be a strategic move targeting a segment of shoppers focused on self-sufficiency and alternative currency, especially amidst heightened concerns about the future and diminishing faith in the U.S. dollar. Jonathan Rose of Genesis Gold Group praised Costco’s initiative as a clever market strategy, coinciding with a period where precious metals like gold and silver have seen substantial gains—gold itself rising more than 15% over the past year and over 55% in the past five years.

With persistent inflation, regulatory pressure on banks, and challenges in the commercial real estate market, tangible assets like gold are seen as stable, safe-haven investments. The trend of acquiring gold has been emphasized further by incidents like the federal indictment of U.S. Senator Bob Menendez of New Jersey on bribery charges, following which 81.5 ounces of bullion were confiscated from his residence. The surge in gold’s popularity is attributed to its perceived stability amidst market uncertainties and its role as a reliable asset in times of inflating economies and rising interest rates, fueled by concerns over bank failures and defaults on commercial loans.

Comprehensive Standard Deviation Analysis On The Yearly Trend Momentum Of Gold Futures Contract

Sep. 29, 2023 11:21 PM ET

Summary

• Gold Futures Contract closed at $1905, indicating a bearish trend momentum below the 18 Simple Moving Average of $1938.
• The VC Yearly Price Momentum Indicator of $1951 confirms the prevailing bearish price momentum.
• Traders advised to consider profits on short positions at intervals of $1816 – $1727 and go long on a Yearly reversal stop.

Comprehensive Standard Deviation Analysis on the Yearly Trend Momentum of Gold Futures Contract

The closing of the Gold Futures Contract at $1905 serves as a pivotal point for analysis in evaluating the ongoing market trends and conditions. The market’s resolution below the 18 Simple Moving Average (SMA) of $1938 substantiates a bearish trend momentum, necessitating strategic consideration for traders and investors.

Yearly Price Momentum:

The culmination below the VC Yearly Price Momentum Indicator of $1951 underscores the prevailing bearish price momentum. A conclusion above the VC Yearly would countermand the current bearish signal, rendering it neutral.

Yearly Price Indicator and Strategic Recommendations:

1. Profit Consideration for Short Positions: Traders are advised to contemplate profits if short on corrections at the intervals of $1816 – $1727 and to align their strategies to go long on a Yearly reversal stop.

2. Operational Strategies for Long Positions: Traders maintaining long positions should adhere to the $1727 level as a Yearly Stop Close Only, ensuring the order status remains Good Till Cancelled.

3. Profit Realization for Long Positions: It is propitious to liquidate profits on long positions upon attaining the $2039 – $2174 levels during the ensuing year.

Conclusion:

Given the prevailing market conditions and trend momentum, meticulous attention and strategic alignment are paramount. The market dynamics mandate a thorough examination of the positions, either short or long, to optimize profit realization and minimize potential risks.