Thursday, August 25, 2016

Fed's Change In Tone Could Mean Gold Takes A Breather

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*The Fed increased their hawkish tone over the last two weeks.
*That likely means they are aligned to hike rates.
*The initial reaction to a hike in rates would be to sell inflationary assets like gold.

We went bullish on gold June 20th. We were excited about the fundamental story in gold (NYSEARCA:GLD) because medium to longer term there is a meaningful inflation risk. In the very near term The Fed may pour cold water on inflation with talks of a rate hike. Fed Chair Yellen's speech tomorrow could hint or flat out expect a hike in rates. This may be the first hike in a series of hikes to get back to "normal." That is a meaningful change to the story since we've been touting gold. That could mean gold either takes a breather or has downside. That will depend on how much the Fed follows through.
Fed turned hawk
Over the last two weeks the Fed turned hawkish. We reported here and herethat Fed Chair Fischer and NY Fed President Dudley both echoed that we are near full employment and the inflation mandate.
Such thinking likely can make it's way to Fed Chair Yellen's speech that we should expect a rate hike.
After more research it's likely that one rate hike can turn into multiple hikes as the Fed gets back to "normal" in their process of "normalization." It appears that they've concluded that keeping rates at .5% is dangerous for the economy and not working. That combination could push them to raise rates to get back to a level that would give them some fire power to lower them again in the future. That path back to "normal" could mean a series of hikes until we were to reach 2-3% Fed Funds. That is a meaningful potential change to the Fed story.
Whether you agree with the strategy or think it may not happen, that will likely be the drum beat from the Fed. We will not actually know if they follow through on that for another month until their next meeting September 21st.
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Chaim Siegel has been working with hedge funds and mutual funds as an analyst and PM his entire career. Chaim specializes in earnings and predicts, analyzes and reacts to earnings and earnings events as well as developing current company stories with a hedge fund perspective. If you want his analysis real time sign up to the right for real time email alerts. #in, $spy, $qqq, $iwm, $vxx, $ycs, $fxe, $EUO, $YCS, ^GSPC, INDEXSP:.INX, #elazaradvisorsllc, CME Globex: ES Disclosure: These trades can lose you money and principal especially when using leverage BY USING THIS SITE YOU AGREE TO TAKE ALL RESPONSIBILITY FOR YOUR OUTCOMES AND LOSSES AND HOLD BESTIDEAS, ITS CONTRIBUTORS AND ELAZAR ADVISORS, LLC HARMLESS

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