Gold Sector Correction – What Happens Next?
The Long Awaited Correction is Underway
The gathering of central planners at Jackson Hole was widely expected to bring some clarity regarding the Fed’s policy intentions. This is of course a ridiculous assumption, since these people have not the foggiest idea what they are doing or what they are going to do next. Like all central planners, they are forever groping in the dark.
U.S. Federal Reserve Chair Janet Yellen (L) congratulates Stanley Fischer as he is sworn in a vice chairman at the U.S. central bank in WashingtonHi there! Stanley Fischer finds chief central planner Janet Yellen deep in the bowels of the Eccles building. In Jackson Hole, they played “good cop, bad cop”.
Nevertheless, financial markets keep reacting to their words as if they actually meant something – and of course we have to deal with that reaction, regardless of how irrational it is.
As we have mentioned many times during the gold bear market from 2011 to 2015, it was primarily the threat of a rate hike that put pressure on gold and supported the US dollar. We argued that once the Fed finally dared to implement a baby step rate hike, gold would very likely rally in a “buy the news” type response – which indeed happened.
Ms. Yellen’s speech at Jackson Hole (we will post a little post mortem on that gathering of interventionists soon) was still deemed non-committal enough by the markets. Her deputy Stanley Fischer attended the event as well though, and he started mumbling something about rate hikes.
Pure fantasy this may well turn out to be, but rate hike odds as reflected in the Federal Funds futures market shifted anyway. The gold market in turn still seems to care a lot about these shifts, in spite of the fact that trading in the underlying federal funds market is essentially dead as a doornail (with trillions in excess reserves, banks have no need for interbank borrowing). The threat of a rate hike was deemed to have returned.
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