FOMC – An Interest Rate Hike?

 I’ve been wanting to answer a frequently asked question and that question is,

 

” What will happen when the Fed raises interest rates?” Let’s take a look at what has happened in the past, and then maybe we have some historical precedence to go by.

Interest Rate hikes

 

  I have actually been repeatedly asked the question , “What will Gold do in a rising interest rate environment

 

  The answer :  Historically, Gold has been bullish under those conditions. I was trading back in 2004, and back then the FED would actually come out at 10:30 a.m. Eastern time while the markets were open and do a ‘surprise’ rate hike!  Once the dust settled, it was bullish for Gold, Silver, and miners.  The initial reaction was a bit jittery due to the surprise of the rate hike, but as you’ll see, interest rate hikes were bullish for the Precious Metals markets.

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 I want to first note 1 difference and 1 similarity between 2004 and now.

  1. Gold was already in an uptrend after putting in the lows in  2001  (different than right now). 

  2.  Interestingly – The FED said in 2004 that inflation was NOT a concern (But they raised rates 4x in 2004).  The Fed has said that a few times recently too.

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Please note the dates : This article discusses 2 rate hikes in 2004.  June 30, 2004, and then AUG 10, 2004.

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Please note another rate hike SEPT 21 , 2004 & note the comment on inflation that I boxed in.

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Please note November 10,2004 …  a 4th rate hike in 2004. It mentions JUNE, AUGUST, SEPTEMBER and now NOVEMBER.

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So now we know that the Fed raised rates in  JUNE, AUG, SEPT, NOV 2004 –   what did that do to the markets?

 

I have read some articles saying that rate hikes are USD Bullish.  It wasn’t in 2004. The blue arrows are where those rate hikes took place. Right now, we have a very bullish USD and it is hurting Gold & the Yen. We’ll see what a rate hike does if we get one Wednesday.

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SPX –  The markets had a mixed reaction when the Fed raised rates. Markets dropped and got jumpy at first, but overall they were higher after the 4th rate hike. 

1. June rate hike sold the markets off.

2. Aug sold off for 2 days and bottomed

3. The Sept hike sold the markets off too( For a week)

4. Novembers hike stalled a climb.

 

The one we’ve all been waiting for…

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What happened to GOLD when interest rates were hiked after being held down for 4 years?  Gold actually popped with each rate hike. 

Big picture :   Gold went higher from May to Dec, with normal pullbacks.  Interest rate hikes did not kill Gold, even when the Fed said , “We are currently not concerned about inflation.”  They say that today too.

MINERS –  GDX was not around back then, but we used the HUI & XAU to track Miners. I see normal cycles,  maybe you’d see a 1-2-3-4-5  if this was a weekly chart, but any way you look at it,  rate hikes did not hurt Miners. The HUI went from $170 to almost $250 from July to Nov 2004. That’s a rise of about 50% with 4 rate hikes in 1 year!

 

   In conclusion:   “What might Gold & Miners do with interest rate hikes?”  Gold & miners went higher in the past.   However,  current conditions are bit different.  Gold had already bottomed and been trending higher in 2004,  so what WILL happen this time remains to be seen.  In Dec 2015, Gold bottomed on Dec 3rd and then the Dec 14th hike Popped Gold.  The next day Gold saw a fake slam down for one day, and then Gold went higher. 

Big Picture:  Another area to think about is in the Commodities sector.  Last February we made a lot of great trades here in X, CLF, VALE, CLD, AKS, CENX, etc etc etc when commodities bottomed. That took place after the Dec rate hike too.     The trades or investments  that look to present themselves over the next few days, weeks, and months could be very profitable.  The $USD may not like an interest rate hike, and  that should push Commodities, Precious Metals, and OIL higher if the USD drops.  The changes that are developing could become major turning points, so we’ll keep monitoring the big picture as well as the short term trades.   Thanks for being here and welcome to another Fed Wednesday!

 

~ALEX

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Energy update: From yesterday, I was picturing possibly a consolidation in Oil after breaking out.

I mentioned that even though Oil may go sideways, some of the non – extended energy stocks could still move higher too.

AREX–  This is still holding up above the 10sma

 

In Tuesdays report, I did mention that some may be extended and need a rest. We had a strong reversal on OAS, so I drew a possible path to look for.

OAS – So far , this also held the 10sma and closed higher Tuesday. Maybe even some extended Energy stocks will just consolidate sideways?

NADL – This was not extended on the stochastics, but it reversed strongly off the top on Monday. Tuesday it sold off further, but then it and PACD flipped higher and closed up.  This is not extended, it is just moving out of a base at the lows, so it could continue to climb. I own it and I’m watching that 10sma for now.  ( I sold my PACD, but it could move higher too).

CHK – This dip kind of looks familiar.

WPX –  I have been pointing out this set up for days as bullish, and it remains bullish.  Keep this sideways consolidation in mind as I review NAK.

NAK REVIEW – On Dec 12th when NAK ran higher, I said that I sold a partial around $2 ( I posted in the comments real time) and mentioned on thi chart that would buy again below $1.55.

NAK this morning dropped further and I drew this and posted it in the comments before 11 a.m. eastern time. I bought NAK below $1.55 and a few others mentioned that they did too. 

About 15 minutes later, I drew this idea for a friend that emailed me about NAK.  I got him in at 70 cents in November and he sold when I did too.  I was saying that this could be the next lows, along with the above chart hitting 10sma.

NAK – Seriously? It dropped right under $1.55 and recovered to GREEN at $1.67 by the close. If these lows hold going forward, that sell point and buy point was done with almost surgical precision 🙂   So is it off to the moon now? Maybe, but it also may just do this…

NAK:  Going back to that WPX chart in this report, it may just consolidate a bit more.  This allows anyone that didn’t have a buy order in under $1.55 to still hop on board. This would look much like WPX does now. It also look like NAK from Nov 16th to Dec 1st.

WPX with that sideways consolidation.

 

METALS CURRENTLY –  Can we get a GOLD break out with a little help from the Fed please ? It certainly looks like we will.

BY REQUEST:  I was asked to follow the TLT when examining Gold. They seem to be moving identically. So I have to look at a chart like this and ask myself,  “Is this helpful to me in predicting price movement in Gold? Are they so closely correlated that I can use TLT to say where Gold is going to go next, or can I use Gold movement to tell me where TLT will go to next? See the chart below.  At a glance, one may think so.

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SO I broke the chart down, because  “At a glance” they look in sync, but I do not find one to predict where the others price will go consistently.  They move opposite at times, and similarly at other times. Sometimes they top together, other times they are exact opposite. Please follow this chart from left to right ( click to enlarge). 

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SO what about Looking at it in another chart?  I do not see a consistently predictive way of using Gold and TLT. If you look at this chart, one could say that in the 2016 time period,  they moved very closely, right?   At a glance they look it. Do you see the wavy climb last spring (above April 2016) on this chart with both GOLD & TLT?  It looks in sync at a glance, but it is actually the opposite.  Lets zoom in.

 

This is the wavy move from the spring of 2016. March highs in Gold are lows in TLT . April and May are the same. There were differences in September and October too. Using GOLD : TLT historically and even recently, I do not see a predictive value, other than they are both currently in a steep drop and may both reverse when The USD reverses.