Gold Proves Resiliant In Face Of Interest Rate Rise

The popular line is that gold prices decrease when interest rates rise. That statement is true in terms of fundamentals, but incorrect in real-life results. It’s true because gold doesn’t pay interest, so “fundamentally” people will seek a higher rate of return when it becomes available.

In reality, things aren’t often that simple. When “the basic economic fundamentals” were invented, we didn’t really have central banks. Interest rates rose because of supply and demand out in the real world back then, when people were making decisions without so many variables in play.

In the modern world, we have dozens of central banks – representing countries, economic unions, and independent consortiums like the IMF – sticking their fingers in the markets, trying to fix all manner of ills they see.

Fortunately, these groups are generally not completely at odds with each other. But in the case of currency valuations, they often are.

So in the real world, when one country raises its internal interest rate, the value of that currency can be expected to drop. IF there is nothing else standing in its way. Which was the situation yesterday. There wasn’t bad news out of Europe at 2PM Eastern, no saber-rattling with the North Koreans, no bad news from the EU. So the dollar dropped, which led to a rise in gold.

Here’s yesterday’s chart of UUP (the US Dollar index) – notice the drop starts right at 2PM, when Queen Janet announced the interest rate hike.

Now, your friendly Gold Enthusiast will happily admit to being wrong in his expectations of yesterday. He expected to see a rise in UUP and a drop in gold prices following the announcement. That didn’t happen.

One of the first rules of thumb The Gold Enthusiast teaches new traders is:

Trade the market you have, not the market you want.

It’s all well and good to have expectations. At the same time you have to realize you don’t have enough money to make the market act the way you want. (At least, not for long, and possibly only until the po’lice come a’knockin’ at your door. Just ask the Hunt brothers.)

So The Gold Enthusiast apologizes for not pointing out that if gold headed up instead of down, to also buy some. If you did, great! If not, we’ll get them next time.

This morning GLD is back above 116. So we’re back in the 116 to 118 range. Remember our trading rule is buy (or cover shorts) as GLD is rising up from a level, and sell (or short) as it drops below a level.

And if you’re hesitant, now is not a bad time to be hesitant. We haven’t seen the start of a big move yet. Yesterday was a reaction to news, which put gold back about where it should be right now, in the eyes of your friendly Gold Enthusiast. The big move is still a bit down the road.

So we’ve weathered the big storm in the Northeast, and the Fed’s latest messing about with the market. We didn’t only survive, we thrived. So there, ancient fundamentals!

Signed, The Gold Enthusiast

DISCLAIMER: At the time of writing, the author has no position in GLD and is long NUGT. The author has no plans to enter a position in GLD but may day trade NUGT over the next 48 hours.

Leave a Comment