The incessant commentary about the FED hiking rates is supported only by government data. Retail sales appear great as does the employment situation. Everyone is entitled to their opinion and mine is the data is fabricated.
The rationale is simple. The FED is out of bullets. They cannot be zero bound when the next downturn comes. They cannot be zero bound when the equity market goes into a bear market. There is however a very big problem with the rate hike camp. The yield curve is collapsing and the FED has never raised rates in any environment other than a rising yield curve. The other elephant in the room is obviously the dollar and the effect it has on “inflation mandates.” With the Western World desperately trying to create inflation by crushing their respective currencies, the FED is supposedly going in the other direction.
The gold market is tracking the Yen/$, although the correlation is definitely weakening, as absolute levels suggest gold should be much lower. So, where does this leave us heading into the FED meeting?
Going back six months we see a bullish broadening wedge. Refer to Bulkowski for the odds of a breakout and the measured move.
In a shorter time frame the view is a little less sanguine.
Gold is most likely going to fall out of this short term rising wedge. The FED meeting and the Japanese election will have great influence on what it does from there.
In the longer term the only thing that matters is gold de-coupling from the dollar trade. The spark that will make this happen is without a doubt one of two things. Either there is a military confrontation of extreme significance or we start to see massive stress in global sovereign debt.
Once either or both of these occur, the pair trades that everyone seems to have on, along with hedges that have worked for years will all go up in smoke. That period of time is coming and when it does I believe volatility in gold will reach unprecedented levels. Until that time, gold will continue to trade irrespective of supply and demand fundamentals and simply mirror FX.
Written by: It’s a Mystery