As we have witnessed before the Federal Reserve rate hike, we once again see weakness in the gold price in the immediate anticipation of an expected Fed rate increase. Both of our updated proprietary models use 3-month Treasury yields as a leading indicator. The futures market is at a 94.4% probability. They are simultaneously confirming that the 6th rate hike of the present cycle is due this week on Wednesday afternoon at 2 pm EST:

For the week in sum, gold closes lower by $12 (0.9%) to finish at $1,312. This is as of the final trade on the New York COMEX futures market on Friday afternoon.

Federal Reserve Rate Hike & Precious Metals

The precious metals sector, most notably silver and the mining complex, continue to act weaker than gold. However, we have seen some things in four out of the past five rate hikes since 2015. Precious metals futures traders have consistently gotten this trend wrong. So, we are hesitant to draw conclusions from the recent price weakness. We will wait until after the Fed meeting on Wednesday and for the remainder of the trading week.

If the market is again set to reverse higher following a Fed rate hike, the pending advance should put gold within proximity. It will challenge 2016 highs at $1,378 per ounce again. We continue to expect this 2016 – 2018 resistance zone to break on the next legitimate attempt.

Further, the futures market is pricing in two additional Fed rate hikes by the end of 2018. This will increase rates to a target range of 2.00% – 2.25%. This is up from expecting an 1.50% – 1.75% by Wednesday (right):

Gold Consolidating Under 2016 Highs

The original gold chart thus updates as follows:

Both an aggressive and an alternate lower scenario (red arrows) remain possible if markets are surprised by hints of accelerated balance sheet reduction. Which is by the new Fed Chairman Jerome Powell during the accompanying policy statement Wednesday at 2 pm.

Recall that “balance sheet reduction” is a euphemism. It is for the extinguishing of previously-created fiat money. Fiat money for the purchase of U.S. government bonds. Which through the subsequent sale of those bonds. While such sales do indeed lower the Fed’s balance sheet, they do not address the more insidious inflationary impact of those past bond purchases. The multiplier effect seen as the newly created currency is lent out through the fractional-reserve banking system to favored institutions.

An Important Week Ahead

Our best assessment is that this is going to be a critical week for the precious metals complex. Silver is threatening to break down from a yearlong consolidation. This a situation which, if confirmed, will alter the timeline for a possible sustained advance. Yet, gold makes five clear attempts to overcome the $1,378 resistance from 2016. It is still situated close enough whereby any significant rally would see this level defeated. This just before a possible Fed rate hike. It will be a scenario which has seen strong reversals higher in four out of five occasions since 2015.

We will have a lot more information at our disposal by Wednesday. However, it will be more prudent to observe the follow-through price action into the close of the week on Friday before we conclude.

Suffice it to say; this is an important week for precious metals investors.

Time to write the history books. The monetary experiment we are living through over the past decade has no comparison. However, with a regular and strict examination of the charts, we can maintain a level of clarity. The clarity that is impossible amongst the excitement that often accompanies what is inherently an emotional topic. Gold, which is humankind’s most ancient yet most enduring store of wealth.

Christopher Aaron

Bullion Exchanges Market Analyst

Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency. This is where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy of blending behavioral and technical analysis has helped him and his clients. It helps to identify both long-term market cycles and short-term opportunities for profit.

This article is third-party analysis. It does not necessarily match views of Bullion Exchanges. Readers should not consider it as financial advice in any way.

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