After what looked like the worst may be over in gold, Yellen came out swinging yesterday afternoon. With talons clenched, Yellen delivered her intention for 3 hikes next year, and the news was a wrecking ball for gold prices.
The wall of support built over a month in the Gold Miners Index was toppled, and gold prices slid another $20.00 to close at $1,144 / oz. Unfortunately for gold investors, there has been no reprieve from the selling as of this morning’s open. Gold is currently sitting at $1,128 / oz, and each new low made is like nails on a chalkboard for gold bugs.
Fortunately for the gold bugs, there are some silver linings left. The day after the Fed meeting was a very important day for gold last year. This day marked the bottom for gold in 2015, and was the final flush to take out the remaining wavering bulls. While there is no guarantee that today delivers the same effect, this has all the looks of a flush thus far.
In addition to the significance of today for gold investors, bullish sentiment in the metals has been absolutely crushed. Bullish sentiment on gold sat at 9% bulls as of yesterday’s close, and I am predicting a reading of 4% after today’s trading finishes up. This would mark the lowest reading for gold bulls in over 2 years, with the most recent reading on November 7th, 2014. November 7th, 2014 was a great time to be a buyer of gold, as the price of gold shot up $180 / oz in less than 3 months.
So where do we go from here? Do we really try and fight the Fed after they’ve stated a plan for 3 rate hikes next year?
Once again investors may find solace in the fact that the Fed’s words are about as reliable as a junkie’s promises when it comes to not relapsing. Last year the Fed stated that there would be 4 hikes in 2016, and we ended up with a single hike. Last year’s trend was (-) 3 hikes from their initial guidance. If the Fed were to continue with this trend for 2017, we would actually see no hikes next year, as we’ve only been prepped for 3.
In addition to the Fed’s insane outlook for 3 hikes in 2017, this guidance is totally against their agenda. The Fed has constantly been a back-stop for the market, and there is nothing worse for US companies than a strong dollar. The USD is currently trading at 2-year highs, and US companies have no hope of keeping pace with record earnings with the dollar at this rate.
I believe the Fed is bluffing on their guidance of 3 hikes, and I would be surprised to see more than one hike this year. The Fed is notorious for over-promising and under-delivering, and this strategy works well to burn shorts and fuel the market higher. The market hates rate hikes and cannot afford a higher dollar, therefore the Fed wins if they come out dovish at the next meeting. Bears piling on the US stock market to prepare for a year of 3 hikes and declining earnings, will see their shorts go up in flames (pun intended).
So how does this affect gold?
If gold is currently being priced in for 3 hikes this year, any dovish talk by Yellen would likely put a floor under the metal. I expect Yellen to come out more dovish in 2017, and think that this would be quite positive for gold going forward. The worst possible case for gold bugs (other than a 50 basis point hike) came true yesterday with the news of 3 hikes, yet gold has only shed $30 / oz. While this certainly made for an ugly 24 hours, this was no cataclysmic or earth-shaking event. If this is the most that the Fed could do to the gold price, I think gold bugs should be sitting happy at these levels.
I stated prior to the Fed meeting that I expected that most of the downside had been seen for gold, and the market just wanted certainty. The gold market now has certainty, and it will likely begin to put in a bottom now. Markets hate uncertainty, and there is nothing more difficult than having to guess the Fed’s hand and position for it. Now that traders are aware of the Fed’s intentions, the uncertainty is off the table, and large traders can reposition themselves going forward.
So how am I positioning myself?
With sentiment set for its lowest daily send chills down close in over 2 years, I am long gold currently. My stop on this trade is a close below $1,125 / oz, which would put me on the sidelines for the time being, if this level is violated. While the Fed’s words yesterday were enough to send chills down gold bugs’ spines, I think the majority of it was priced in. I expect today’s extreme low in sentiment to put a floor in gold prices short term, and we will have to assess how gold deals with resistance on any counter-trend rally. Ideally, we want to see gold get back above $1,180 / oz, and then take out the important psychological $1,200 / oz level.
There is a saying in investing that when there is blood in the streets, one should be a buyer. I believe this saying is a massive understatement when it comes to the gold market. The price of gold has fallen off a cliff to the tune of $215 / oz over the past 30 trading days, and we have bodies in the street at this point. If blood in the streets makes one a buyer, then bodies in the streets should make one just as confident we are likely near bottom.