How December’s Expected Rate Hike Could Affect Gold

As we head into December, all eyes will be on the next Fed meeting set for December 13-14th. As the CME Fed watch tool indicates, a rate hike at the next meeting is almost a certain.

So if they do raise rates as expected, what effect can we expect it to have on the price of gold? Almost everyone believes a 25 basis point hike is already in the market. I can’t argue against that assessment, but one of our retail dealer friends asked me yesterday, with the possibility of more rate hikes in 2017 where will the price of gold go?

My first thought was if I knew the answer to that question I’d be in Aruba instead of the northeast this time of year, but being the polite guy that I am, I just said, “I really have no answer, we will just have to wait and see the economic data that’s released in early 2017.”

Let’s look at the CME FED FUND Watch tool to view what the market thinks are the chances of a rate hike at the FED meetings in February and March. The market indicates the chance of another rate hike in February is at 5 percent. and at 15 percent for the meeting in March. So at this point, the market says it’s a one-and-done, for at least the first quarter next year, but with the new President coming in we all can agree that 2017 should be a lot different than 2016.

Let’s look at the most recent high in the price of gold, that was on election night trading a high of $1,237. The dollar index at the same moment was trading at 95.88. Ten Year Bond yields were at 1.72 percent and Thursday we set a new high yield for 2016 at 2.492 percent.

At this moment in time, after the November job numbers report was released at 8:30 ET, February gold is trading at $1,173, the Dollar index is at 100.94, and 10 year bonds are yielding 2.41 pct.

The question that is on everyone’s mind this morning is will gold hold these levels or head south as the majority of the street predicts.

With the price of gold breaking through two key support levels in the February gold futures contract at $1,190 and $1,172 to trade down to $1,162.20 yesterday, the market sell off had gained momentum. BUT at that level good buying emerged into the market and the selling dried up. Which in turn got some nervous shorts to cover and Aa rally ensued, which I must admit I am very happy to see.

Thursday morning one Wall Street Gold trader I spoke with was calling for a testing of the low in the price of Gold that was hit in 2015 at $1,046. I said that’s a stretch, don’t you think? I thought his reply was kind of funny, “You talk your book and I’ll talk mine.” So as we settling above the last level of support at $1,172 in February, this will give the shorts something to think about which way the market is headed.

As I make dinner reservations at a Second Ave. New York Steak House to thank my technical friends for a great job predicting the direction of gold in 2016 and to assure my readers I will look to them for future indications. BUT hold on, I still have not yet conceded that I am wrong about the direction of the market, because I enjoy being the only guy in the room with a contrarian opinion from the rest of the group.