The highly anticipated FOMC meeting has now come and gone, and as expected, the central bank raised the Fed Funds rate by 25 basis points. The move by the Fed was not a surprise at all, although the central bank did appear to catch markets a bit off-guard with its latest projections.
The Fed’s dot-plot now calls for three interest rate hikes next year as opposed to the market’s previous expectations of two hikes. In the grand scheme of things, an extra 25 basis point hike may not seem significant. The additional potential hike does, however, point to a more hawkish Fed.
Inflation expectations have been ramping up since the Trump Presidential election victory last month. His calls for increased fiscal spending and tax cuts have been called highly inflationary, although it remains to be seen if many of the discussed proposals will actually become policy.
It is also important to remember that not too long ago, it was projected that the Fed would hike rates four times in 2016, yet the central bank was only able to hike once. Rate expectations can and do change quickly, and there are numerous reasons that three hikes may not be seen next year. Either way, the case for a slow and steady pace of rate hikes remains intact, and could be bullish for gold.
For the time being, the Trump rally remains in full force, and markets have thus far not shown any real signs of reversing course. Stocks remain near recent all-time highs, and could potentially see even further gains before the rally has run its course. The dollar index also is poised to keep moving higher, and the stronger greenback is almost certainly having a negative effect on gold. Interest rates also continue to rise and bond prices have yet to stem the recent bleeding.
Of course, markets do not typically go straight up or straight down, and we would expect to see some type of reversal in these markets-perhaps even a significant reversal-before they possibly continue in their current trends.
The perfect storm of stronger risk appetite, higher equities, a higher dollar and rising rates has beaten gold down considerably. There are, however, numerous reasons that gold can still shine bright in 2017.
Some of those reasons include the potential for a massive banking crises and significant volatility in the Eurozone, ongoing tensions with Russia and increasing inflationary pressures.
Gold may remain on the defensive in the near-term, although the market may be close to a major turning point. Sentiment surrounding the gold market has been approaching a bearish extreme, and once the last gold bull has thrown in the towel, the market could potentially turn and turn hard.
If current outside market trends continue, gold could see another wave of selling that could potentially take prices down to the $1080 area. Such a move could very well drive long capitulation, and could potentially mark a medium to long-term low in the price of gold.
We believe gold represents an excellent value at or near current levels, and view any further downside in the gold price as an excellent opportunity for the long-term investor.