Investors increased their bets on the Fed raising interest rates before the end of the year. What does it mean for the gold market?

Hard times came for gold bulls. The price of gold (London P.M. Fix) fell 4.6 percent from $1,313 to $1,253 over the week. And we do not have good news. Yesterday, gold prices went south again, as the market odds of at least one Fed hike through December increased from 65.1 percent before the weekend to above 70 percent yesterday. The chances of two hikes increased to almost 7 percent. Hence, gold prices are now under downward pressure amid intense speculation that the Fed will raise interest rates in December.

Now, the key question is which way gold will go? Are we in a short correction within a bull market or will a bear market resume? Well, you will find technical analysis in our Gold & Silver Trading Alerts. In Gold News Monitor, we focus on fundamental aspects of the precious metals market. And, you know, it’s a bit funny, but we have a replay from last year, when the probability of a Fed rate hike also started to rise in October. Actually, it skyrocketed from about 25 percent in mid-October to about 70 percent in early November. We guess that we do not need to remind you that it was not a great period for gold prices. As one can see in the chart below, the price of gold declined about $100 then.

Chart 1: The price of gold (London P.M. Fix) over the last twelve months.

Therefore, we can see further drops in the gold market. A lot depends on the message of the September Fed minutes which will be released today. However, the U.S. central bank seems to be really determined to hike in December. Indeed, regional Fed presidents have been talking about rate hikes the last two weeks , while the U.S. central bank reduced its balance sheet by $286 billion since the last FOMC meeting in September. As a reminder, the Fed cut the excess reserves in the banking system before the December 2015 in order to support the rise in interest rates. Thus, such a move is a hint of the Fed’s plans regarding the tightening of monetary policy.

The take-home message is that the market odds of a Fed hike rose again and stand now at about 70 percent. Although the room for further increases is limited, the hawkish September Fed minutes may send gold prices deeper south. The rise in probability of a December hike is a replay from last year, when market odds skyrocketed in the second half of October, pushing the price of gold lower. This year, that dynamic is weaker, however, we now have a much more overbought market. Hence, although the long-term fundamental factors for the gold market remain generally positive, we may see the continuation of the correction in the short term, especially as investment sentiment has not yet reached extremely bearish levels.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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