Gold and December Hike
Wednesday's FOMC release of the dot plot and Warsh press conference pushed bond market to price rate higher probabilities for a 25-bp rate hike in September and a full chance of a similar rate hike in October. Note how the white and green graphs have moved from below zero (yellow circle) to above above zero, shifting from rate cut to rate hike expectations. The green graphs shows 0.86%, implying an 86% probability of a quarter point hike in September, accompanied by a rise in DXY and decline in gold. The 2nd chart highlights the importance of the June 15th gap, whose floor stands at 4245/6, presenting a solid short-term support, which held successfully yesterday.
Gold resumes its inverted relationship with oil. Rising oil forces oil importing countries to sell some of their gold reserves to cover oil costs (Turkey, Bolivia, Ghana, Uzbekistan). Rising oil leads to higher inflation, eliminating the need for the Fed to cut rates, which is not a positive outcome for gold and silver. If inflation rises but the Fed continues to signal at cutting interest rates (or to not raise rates), then this will be seen as causing more inflation. In this case, the bond market will "raise" interest rates via higher yields. Higher bond yields are seen negative for gold and silver. Especially if yields rise faster than inflation That is why it is important to understand what Kevin Warsh, the new head of the federal Reserve will say about inflation and interest rates on Wednesday. If he proves to be dovish -- and bond markets do not believe him, then we could see a selloff in bonds i.e. a rise in bond yields.
Take a look at the message from Silver's daily and weekly charts. Does this mean $60/oz is inevitable?
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