Gold Price ‘Set to Plunge’ If Fed Hikes Rates

Gold Price ‘Set to Plunge’ If Fed Hikes Rates, But ‘Short Squeeze’ on Weak Inflation Mark ‘a Higher Low’

Bullion.Directory precious metals analysis 17 September, 2015
By Adrian Ash
Head of Research at Bullion Vault

New York stock markets edged higher, as did Europe, but emerging Asian equities earlier closed sharply down.

US Treasury bond prices meantime steadied around Wednesday’s 6-week lows, with the 10-year bond yield edging back from 2.30%.

With the US Federal Reserve now holding its key interest rate at 0% for almost 7 years, “Expect a huge decline in gold prices if the FOMC hikes rates,” the Wall Street Journal quotes one US futures brokerage.

But “[yesterday’s] lower US inflation data may potentially keep the Fed from announcing the long expected interest rate raise on Thursday,” says a bullion desk note from Germany’s Commerzbank.

Calling Wednesday’s jump a “short squeeze“, the move “prior to the FOMC caught the market off guard,” says Swiss refining and finance group MKS’s traders.

“Gold had a big day [Wednesday],” agrees bullion bank Scotia Mocatta’s New York team, noting that gold “posted a ‘higher low’.

“If we can make a ‘higher high’ above the $1170 high from August, that would be bullish for gold.”

But the gold price’s “multi-year [down]trend at $1163/1173 will remain a key resistance,” add fellow London market market Societe Generale’s technical analysts today.

“Eventually the downtrend should persist towards recent lows of $1080, a decisive level for next leg of downtrend.”

Looking ahead to possible volatility in gold prices on the Fed decision, “support is at [Tuesday]’s low of $1097,” says Scotia.

Elsewhere Thursday, the Swiss National Bank kept its key interest rate at a record low of minus 0.75%, but warned that the Swiss Franc remains “significantly overvalued” after it was de-pegged from the Euro – ending a half-trillion-dollar program of quantitative easing, used to buy foreign currencies and depress CHF – at the start of this year.

The Bank of Japan, having already created and spent QE money equivalent to 65% of the country’s GDP on buying government debt, “will make necessary adjustments while examining both upside and downside risks on the economy and prices,” said governor Haruhiko Kuroda in a speech overnight.

The European Central Bank – now with QE equal to 5.3% of the 19-nation currency union’s GDP – may yet cut interest rates further, according to analysis cited by Reuters, because “the Euro is 8% stronger than when QE started six months ago, although a Fed hike might hurt it again.”

Gold priced in Euros edged 1% lower on Thursday from yesterday’s 1-week high at €994 per ounce.

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