Tag Archives: alternative

Will GLD Keep Losing Its Shine?

Summary The gold market is expected to be pressured down as the U.S. dollar resumes its upward trend and the Fed moves towards raising rates. The focus is shifting towards the Fed’s normalization path. The market estimates only two to three rate hikes next year. Shares of the SPDR Gold Trust ETF (NYSEARCA: GLD ) and price of gold climbed back up last week, in part as the U.S. dollar changed course and fell following the lower than expected rate cut by the ECB. In her recent testimony to Congress, FOMC Chair Yellen signaled the U.S. economy is ready for higher rates. And the last non-farm payroll report , in which 211,000 jobs were added back in November, reaffirmed market expectations for the Fed to raise rates this month. Labor market continues to improve The recent NFP report showed a bit higher than expected growth in number of jobs. Wages rose by 0.2%, month over month and by 2.3% for the year. And while not all figures in the report were good — the real unemployment (U6) edged up to 9.9% — it was still overall good enough to pave the way for a December rate hike. Thus, this jobs report along with Yellen’s testimony should have raised the implied probabilities of a rate hike but for now the odds are at 79% — little changed from the previous week. The problem with raising rates at this stage is that the core inflation is still low. And it will be even harder for inflation to rise as the Fed’s cash rates moves up. Nonetheless, as the Fed moves towards raising rates in the next meeting, the price of GLD could resume, even if over the short term, its downward trend. And once the FOMC raises rates this month, the median outlook the Fed targeted in September will be met, as indicated in the table below. Source: Fed’s website Even though the labor market is doing well enough to prompt the Fed to raise rates this month, this week the JOLTS report will provide another perspective about the progress of the labor market. The recent depreciation of the U.S. dollar, mainly against the Euro, came after the ECB didn’t introduce stimulus as the market expected. The recent break we had from the rally of the U.S. dollar has helped pull back up GLD. And the U.S. dollar is expected to resume its rally, which will keep pressuring down GLD. Looking beyond the upcoming rate hike, and assuming the Fed moves forward and raises rates this month, the outlook for the future hikes suggest only a few rate raises in 2016. If rates were to rise at a slower pace than previously expected, this could hold the price of GLD from falling next year. (click to enlarge) Source: Fed-Watch The table above shows the implied probabilities over the next FOMC meetings 2015-2016. Based on these figures, the market expects the target rate to reach 0.84% by the end of 2016 – over 0.5 percentage point lower than the FOMC’s median outlook of 1.375%. Based on the Fed-watch outlook, this implies two rate hikes next year of 0.25% (again, assuming the Fed were to raise rates this year). If this outlook will coincide with FOMC members’ estimates, then the Fed will revise down its projections in the next meeting. And downward revisions could partly offset the expected adverse impact the rate hike will have on GLD. If rates were to remain lower than currently expected next year, the downward pressure on GLD will be less intense. Bottom line The gold market isn’t expected to shine or see rising prices anytime soon, especially as the Fed moves towards raising rates in December and U.S. dollar keeps climbing against other currencies. But following the initial rate hike, which is likely to have a short term negative impact on gold prices, it will be more important to see how the Fed plans raising rates in 2016. The current market outlook aims towards only 2 to 3 hikes next year. Lower than previously estimated rates could hold GLD from plummeting, albeit this won’t stop the general downward trend. For more please see: ” Gold and Inflation – Is there is relation? ”

An Interest Hike Doesn’t Mean That Gold Price Must Crash

Summary The Fed chairwoman Janet Yellen stated that the U.S. economy is strong enough for the Fed to start raising the benchmark interest rate. The pace of the U.S. GDP growth and the inflation rate don’t indicate that there is any need to raise the interest rate. Any interest rate hike will be probably only symbolical and it won’t be followed by another interest rate hike anytime soon. History shows that gold and GLD prices often react on the interest rate changes in contrary to the theory and general expectations. Gold price has been in a strong downtrend for the last couple of weeks. The SPDR Gold Trust ETF (NYSEARCA: GLD ) reached a new multi-year low, just shy of the $100 level. It represents a more than 10% decline since the middle of October. The decline was driven by increased expectations that the Fed will raise the key interest rate as soon as in December. The probability was further supported by a very strong October job report . Although the November data are a little weaker and some of the economists, including Peter Schiff claim that the state of the U.S. economy is worse than the numbers show, statements of the Fed representatives still indicate that the interest rate may be hiked this month. According to Janet Yellen, chairwoman of the Fed, the U.S. economy is strong enough for the Fed to start raising the benchmark interest rate. Is an interest rate hike needed? The probability of a December interest rate hike is high, although I don’t see any good reason why to raise it. Yellen explained why the Fed wants to raise the interest rate when she stated : Were the FOMC to delay the start for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from overshooting. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into a recession. Yes, the reason is good. The above-mentioned statement makes sense. But the officially-presented data don’t indicate any risk of an overshooting anytime soon. The annual pace of the GDP growth rate is only slightly above 2% and the inflation rate is at 0.2%! Actually, the deflation is much more probable than overheating of the economy, according to the official data. There are a lot of discussions about the accuracy of the officially-presented data. For example, according to John Williams and his website Shadowstats.com , the current inflation rate is close to the 4% level using the 1990 methodology, and it is around 7.5% using the 1980 methodology. In this case, we can start to speak about overheating of the economy. It really seems that the Fed publicly presents one set of macroeconomic data and it makes policy decisions based on another one. (click to enlarge) Source: Trading Economics Moreover, raising the interest rate too much may damage the U.S. economy. The strong USD already has a negative impact on the U.S. exporters. It may also damage the foreign economies, as a lot of the companies around the world have big USD-denominated debts, and they are dependent on revenues denominated in other currencies. As the value of these currencies falls, the companies will have more and more problems with the debt service. There are a lot of reasons why to expect that if there is any interest rate hike this December, it will be only symbolical and it will probably take quite a lot of time before another hike will occur. There are various economists who have the same opinion and they don’t see any good reason to increase the interest rate right now. One of them is Peter Schiff who expects that the Fed will leave the interest rate unchanged or it will raise it by 0.25%. He assumes that both of the outcomes will be positive for gold, as the markets have already factored in substantially more than a 0.25% interest rate growth. How did GLD share price react in the past? Although theory says that GLD price should decline after an interest rate hike and it should grow after an interest rate cut, history shows that this anticipation is often wrong. The financial markets always try to predict the future development, and the interest rate change is often reflected by the asset prices before the rate change itself is officially announced. And if there was a strong trend before the rate change, the trend may get disrupted for some time, although it tends to resume after the dust settles down. 22 interest changes occurred since the inception of GLD. In 12 cases, the interest rate was increased and in 10 cases it was decreased. The table below shows the development of GLD share price 20, 10 and 5 trading days before the rate change and 5, 10 and 20 days after the rate change. It is interesting that on average, GLD price grew before the interest rate change and it was in a slight decline 5 and 10 trading days after the rate change. But 20 trading days after the rate change, it was back in green numbers. Only in 4 out of 12 cases (33.33%), the GLD price recorded any losses 20 trading days after the interest rate hike. It declined by 4.73% on average. On the other hand, in 66.66% of cases, the GLD price recorded gains (5.08% on average). In 4 cases (33.33%), the GLD price just kept on growing, without any reaction on the interest rate hike. After the Fed started to cut the interest rates, GLD was down in 50% of the cases after 20 trading days. After the interest rate cuts on March 18, 2008, October 8, 2008 and December 16, 2008, a strong growth trend turned into a steep decline. It shows that GLD often reacts contrary to the theory not only after interest rate hikes but also after interest rate cuts. (click to enlarge) Source: own processing, using data of Yahoo Finance and the Fed Conclusion If the Fed hikes the interest rate during its meeting on December 15/16, it doesn’t mean that gold and GLD prices must crash. The official macroeconomic data don’t indicate that the U.S. economy should start to overheat anytime soon; moreover, a too strong USD may hurt not only the U.S. economy. Any rate hike will be only symbolical and it will probably take a long time before another one will occur. The markets may actually welcome that the more than a year long saga is finally over, and the GLD price may react positively. As the not-so-distant history shows, it wouldn’t be the first time when GLD price grows after an interest rate hike. Adding to it the problems the gold miners have to face at the current gold prices and the high demand for physical gold, GLD presents an interesting contrarian opportunity.

HYG Junk Bond ETF Continues Lower As Oil Prices Fall

The high-yield junk bond ETF (NYSEARCA: HYG ) continues to trend lower, and Monday’s drop of 0.7% left it at a new multi-year low. As HYG’s price moves lower, its yield moves higher, but at 5.8%, the yield is still half of what it was at the start of the equity bull market in early 2009. Investors look for the “risky” equity market to trend in the same direction as the junk bond market, but clearly that hasn’t been the case over the last 18 months or so. As “junk” has fallen, the S&P 500 has continued to trend slightly higher. The reason is because of the drop in oil prices. High-yield debt in the Energy sector accounts for a large portion of the drop in the broad high-yield debt market, but stock price drops in the Energy sector haven’t been enough to move the needle significantly lower for the broad S&P 500. Below is a chart of the price of oil compared to the HYG junk-bond ETF. They have tracked each other very closely recently. We covered this topic in more detail in Monday’s Chart of the Day (subscription required). (click to enlarge)