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Why Gold Prices Today Are Trending Lower After Fed Rate Hike

This is a syndicated repost courtesy of Money Morning - We Make Investing Profitable. To view original, click here. Reposted with permission.

It’s been a tough week for gold bulls of all stripes. Gold prices today (Friday) are mostly flat, up just 0.62% in afternoon trading.

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This week, the Fed went ahead and raised rates by 0.25%. No surprise there. Effectively, the fed funds target rate has now moved up to a range of 0.5% to 0.75%.

While the Fed did follow through with an increase, keep in mind that these rates are low. Historically, they’re still extremely low.

gold prices today

Nonetheless, the short-term reaction in gold prices has been negative.

Up until the Fed’s rate hike announcement was official, the price of gold was still trading at $1,161 an ounce. Within just two hours, it had dropped to $1,142, then fell a little further on Thursday. As I write, gold is down by another $12 to $1,130, losing 17% since peaking this summer.

Existing bonds, which already pay a fixed coupon, are in a challenging environment, too, because increasing rates compete with them. So long-term bonds are tanking and have been since July.

On the other hand, a rate hike has helped boost the U.S. dollar, which now pays higher short-term interest. And a higher dollar, at least in the near term, weighs on gold priced in dollars, since it takes fewer of them to buy the same ounce.

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While that’s a relationship that holds true over the short term, the longer term says something different. There have been numerous periods (think late 1970s, early 2000s), lasting months and even years, when gold prices and the dollar have risen together.

Let’s look at gold prices today first, then we’ll examine other factors that could turn out to be very supportive of gold well into next year and beyond…

How Gold Prices Today Are Trending

The gold price ended the previous trading week on Friday, Dec. 8, dropping by about $10 to close the week at $1,160.

On Monday we saw a small reversal, as gold prices opened at $1,155 and climbed to close at $1,162.

Tuesday saw a weaker open at $1,159, and after some bouncing around closed almost breakeven at $1,158.

Of course Wednesday brought out the fireworks. That’s when the Fed confirmed the awaited rate hike, swiftly tanking gold prices by $19, which followed through on Thursday. That’s when gold hit an intraday low of $1,123 but recaptured some to close at $1,129.

And here’s what the U.S. Dollar Index (DXY) did over the past five trading days.

gold

It was a stunning surge that began right after the news of the rate hike and bled well into Thursday, taking the DXY up nearly 250 basis points from Wednesday’s low to Thursday’s peak. That, of course, was a formidable test for gold to counter.

Gold prices today are mostly flat, sitting at $1,135 in early afternoon trading.

But there are other factors to consider when contemplating what may lie ahead for gold…

Where Gold Prices Are Headed from Here

Like I said earlier, higher bonds and the higher dollar are both competing with gold, which pays no interest.

But that’s what you’d expect, and that’s what happened. Yet the last Fed rate hike, almost exactly a year ago, marked a bottom for gold the very next day. Will that happen again? Only time will tell, but history could indeed rhyme.

We also shouldn’t discount the risk of inflation. Gold tends to perform well in a scenario of negative real interest rates. That’s when inflation outpaces interest rates. And right now, even with short-term rates at 0.5%, inflation is running at 1.7%, meaning a negative return of 1.2%. That’s when you want to own gold.

In the near term, we could see continued pressure on gold. There’s strong support at the $1,100 level.

But that can change on a dime, especially since it’s looking very oversold. In fact, the bottom may be behind us. If that’s the case, and we get a sharp rally into the new year, we could see $1,200 in short order. And as we move farther into 2017, I think we’ll see gold reach $1,400.

 

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The post Why Gold Prices Today Are Trending Lower After Fed Rate Hike appeared first on Money Morning – We Make Investing Profitable.

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