Gold prices have eased this week, with the price of the yellow metal now trading at USD $1,053 an ounce, down nearly 2% from last Friday’s London PM Fix. Silver has also eased too, with the precious metal complex digesting the highly anticipated Federal Reserve monetary policy decision, which saw the US central bank raise interest rates for the first time in nearly a decade.

In Australian dollars, gold and silver are trading just below $1480 and $19.50 an ounce respectively.

The uptick in interest rates, which was largely priced in by the markets by the time it arrived, didn’t perhaps have the initial reaction many were expecting, with equities, gold and even some commodity currencies rising directly after the Fed handed down their long awaited decision.

Much of this has been reversed in the past 24 hours, with gold and stocks weakening, whilst the USD has rallied. The swings in the market are seen nearly in the chart below, which shows the last 3 days gold trading, broken down into specific 24 hour trading windows.

As you can see above, the gold price barely moved on the 15th, staying very close to USD $1,065oz. On the 16th, it popped higher, jumping up toward the USD $1,080oz mark after the Fed handed down their decision. But the rally proved short lived, with the market trending back below USD $1,070oz, before breaking lower, and heading toward the USD $1,050oz mark where it sits at present.

To be honest, we aren’t surprised at this kind of chaotic trading and price movements, and we expect all markets (gold, fixed income, currency and equities) could continue to display this kind of short term volatility over the next two to three weeks, especially as volumes may well be light, considering we are entering the holiday period.

Undoubtedly, this kind of volatility, plus the fact gold is at multi year lows will be distressing to some investors, especially with the ever present predictions that gold will soon head below USD $1,000oz, and that silver is on its way back to USD $10oz.

Short-term traders on the other hand, providing they are adequately controlling risk, could be making plenty of money in this environment, not only in gold and silver, but also in equity markets, where +1%/-1% moves are now the norm, as John and I discuss in our technical section below.

But for those of us who are long-term accumulators of precious metals, and believers in the secular bull market, its best to look through it all.

Whether you end up paying AUD $1,400, or $1500oz for your gold, it will in all likelihood not matter greatly in the coming years, which is why dollar cost averaging has worked out so well across the past year or so.

What might happen between now and the end of the year remains to be seen, though the charts are still suggestive of a bounce.

Technical Update

with John Feeney

The past 48 hours have been volatile, with both gold and silver bouncing following the Fed announcement our time early Thursday morning, only to be sold off the next day on the back of USD strength. Go figure.

Markets seem to be very confused and uncertain at this point, so it is very difficult to gauge an idea of short-term movements in gold, silver or any other asset classes.

Indeed it has become the new norm to see the S&P 500 either up or down more than 1% almost every day now, and in turn the ASX200 following suit. The local market seems unsure if it wants to end the year below 5,000 points, or whether or not it might push higher between now and the 31st December, with a traditional Santa rally still possible.

The last few months have seen the highest volatility in US stocks since 2011, and it seems some surprises could be just around the corner.

Back to gold and it still was and is looking oversold, both in US and Australian dollars. The longer term AUD chart is below and we are still oversold in the Williams despite a pick up from the low $1400 range late November.

These charts are obviously never 100% accurate in terms of predicting short term moves but they have been signalling gold is due a rally or at least a decent bounce from these levels.

We will have to wait and see, though we think a big shake up in equities to see some safe haven fleeing into the gold market.

And on that note, whilst we might not get it between now and the end of the year, we think the odds of that equity correction strengthen by the day. Evidence of this is seen in the following chart, which has come to be known as the Buffet Indicator.

In short, it measures the market value of all corporate equities, and divides that number by nominal GDP. It’s a simple enough chart, but its also apparently Warren Buffet’s favourite metric to measure whether or not the stock market is expensive or not (hence the name).

As you can see, it has recently rolled over, and from a very lofty peak, with the market still more expensive than what it was when the GFC hit, based on this metric at least.

This chart should be of concern for anyone who is long equities in their portfolio right now, including Australians with standard superannuation funds, which are heavily exposed to the stock market, both in Australian and overseas.

For those who’ve not seen this chart before – you can find out more about this indicator at the following weblink.

More Rate Hikes to come?

As stated earlier, this week’s rate hike was very much expected by the market, and largely priced in. Whether the Fed follows through with further rate hikes in 2016, and how many, will be a key driver of asset markets next year.

On that note, it would appear that many in the market do not share the Fed’s conviction that there will be up to four further rate hikes next year, or that the Federal Funds rate will end 2016 above 1%.

We’ve also long covered why interest rate hikes, should they eventuate, are just as likely to be gold bullish as they are gold bearish, with market history demonstrating that time and time again.

For those who want a refresher on that, we’d suggest you read the following article, which was published yesterday over at Acting Man.

There are some good charts in there and some very useful data, including a 13 point guide to the fundamentals driving the gold price.

Right now, the market is almost completely focused on just one of those, which is the trend in the USD. The Fed hike this week has many seeing perpetual strength in the Greenback, with some strategists seeing it rise a further 20% in the coming year or so.

That almost overwhelming belief in the future strength of the USD is no doubt one of the reasons sentiment towards gold investment is so poor right now, though we aren’t convinced that dollar strength will eventuate.

Indeed dollar strength is no doubt one of the Fed’s great concerns, with the implications it has for commodity prices and inflation, not to mention the profitability of US corporates, who now generate meaningful proportions of their annual revenue overseas.

Final thoughts for the year

We’ll be sending out a note by Wednesday of next week that will sum up our observations for 2015, and our thoughts for what might transpire next year. We’ll be focusing on gold and silver prices most obviously, but also the Australian dollar, the RBA, and potential developments in the local economy, as well as broader asset markets.

If there are any particular areas you would like us to cover, please feel free to send through an email between now and Monday the 21st December. We will do our best to include it in our piece.

Until next week,

Jordan Eliseo

Disclaimer

This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.