As expected, the U.S. Federal Reserve raised its benchmark interest rate today by a quarter percent, sparking a modest rally in the DOW and S&P and a much more substantial move to the upside for gold.
An interest rate hike is generally positive for U.S. dollar strength and negative for gold so today’s dollar weakness and gold rally is counter-intuitive to say the least. Nonetheless, the metal has found good support around the $US1200 level and might now have the momentum for a much more significant move higher.
The miners also recovered nicely today with the HUI Gold Bugs index up over 7% as was the Philadelphia Gold and Silver Index which tracks intermediate and large scale miners. Just to show you how volatile the mining stocks are, after selling off hard yesterday some of the miners were ahead double digits today, probably reflecting some short covering which was no doubt a factor in gold’s $21.10 spot gain today.
This is hardly a market for nervous nellies and assuming the gold rally continues (spot gold was showing some follow-through strength and was trading higher Wednesday night) there might be a lot more volatility in the weeks and months ahead. It’s a tough market to play for anyone relying on technical analysis so I’ve adopted a buy and hold strategy, mostly intermediate-sized gold producers with a 1-2 year investment horizon which has served me well in the past.
The U.S. Fed’s interest rate hike comes on the heels of the Atlanta Fed downgrading first quarter GDP to 0.8% – its weakest performance in two years. The Atlanta Fed has won praise for being an accurate read on economic growth and its initial estimate for first-quarter growth was in fact 2.3 percent, having reached as high as 3.4 percent on Feb. 1 based on strong data on factory activity and construction spending. James G. Rickards, editor of Strategic Intelligence, has suggested that the Fed raised rates so it would have an actionable tool (i.e. the ability to lower rates) when the economy weakens which might come sooner than many people think.
Add to the uncertainty the upcoming election in France, the UK Brexit, the unpredictability of the Trump presidency, saber rattling by North Korea, and you have a market that’s highly supportive of precious metal prices.