Federal Reserve raises interest rates 1/4 percent.

Federal Reserve raises interest rates 1/4 percent.

Janet Yellen, Federal Reserve Chair, raised interest rates by .25% last week. The action was much anticipated by the market and the action was only the third time interest rates were raised in the last decade. The Fed has been very accommodating to the banks in response to the near global financial meltdown that took place in 2008/2009. The “recovery” has been anemic at best and many feel that the economy still has not recovered to where it was at prior to the near collapse.

What I find most interesting is her very “dovish” comments given during the announcement.  Please note the following from the Bloomberg report:

“Money managers cut their bullish bets on bullion by the most since 2015 in the week ended March 14. The next day, Federal Reserve Chair Yellen reiterated that monetary policy will remain accommodative for “some time,” easing market fears that there might be more than three rate hikes this year. Her words sparked the biggest gold rally since November.”

Interestingly, the raising of interest rates last week was dollar negative and very positive for precious metals. Gold rallied $29.10 (2.4%) and silver added $.49 (2.9%) per troy ounce. The dollar is now at 99.75 and below the psychologically important level of 100 on the US $ DXY chart. Historically, an increase of the interest rates has typically been supportive of the dollar which in turn could be a negative for precious metals depending on other economic factors. The mainstream financial press explained the reaction to the rate hike as follows: “the market focused more on the dovish statements of the Fed and less on the rate hike itself.”

The following link will take you to the Bloomberg version: https://www.bloomberg.com/news/articles/2017-03-19/yellen-surprises-hedge-funds-who-cut-gold-wagers-before-rally

Somehow, the reporter confuses matters a bit by stating that the decline in oil is potentially a positive for gold. I felt his use of the term “this is not your fathers inflation” spoke volumes. He did mention a lack of demand and over production as factors leading to the decline in oil prices below $50.00 barrel. His thoughts were that the decline in oil would perhaps convince the Fed not to raise interest rates in the future and that the market took that into consideration. The reporter went on to explain that with the possibility of fewer Fed hikes in the future it would be dollar negative and consequently positive for gold. Reading between the lines, I think he was trying to explain that the economy is not as healthy as we have been lead to believe.

The question I have is if his theory was correct, why did so many hedge funds get caught off guard and reduce their gold long positions prior to the tightening? The price of oil was below $50.00 prior to the rate increase. Perhaps the hedge funds were caught off guard because they thought that a rate increase would be dollar positive and gold negative. Just as it has always been historically. Additionally, hedge funds reducing their long positions removes support and is gold price negative. Yet, precious metals rallied. Clearly, the hedge funds were wrong.

Something has changed. Is it becoming more difficult to predict market reactions? Or, is some form of economic reality finding its way through some unexpected cracks in the narrative?

By |2017-03-30T21:24:22+00:00March 22nd, 2017|News|

About the Author:

Mike Will is the owner and founder of Encore Gold. Mike is passionate about the truth in life, economics and how those impact us all on a daily basis.

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