The Market's Measure
Fed’s Jawboning Hammers Gold, Flattens Miners

Fed’s Jawboning Hammers Gold, Flattens Miners

Bullion breakout broken?

Just when things were looking good for frustrated gold fans, the Fed slammed the door on their fingers. Quietly. The digit damage was wrought in the Open Market Committee’s policy statement released late Wednesday. While the Fed left its zero interest rate policy intact, it hinted – no, more than hinted – that a rate hike was on deck for its December meeting.

To pick up the hint, you need some skill in parsing Fedspeak. Traders, by their nature, tend to be pretty savvy about central bank jawboning.

The FOMC minutes set forth the conditions that would "be appropriate to raise the target range at its next meeting." BIG change in language. Before, the Fed talked up provisos for keeping rates near zero. Reference to its next meeting (the FOMC is on hiatus in November) makes a December hike more likely. Why? Ask the traders. The mere suggestion of a definitive date sent Fed Funds futures into a tizzy. The market’s term structure now implies a 50% likelihood of a year-end ¼-point jump. Last month, the odds were just 1-in-18.

And gold? Well, bullion dropped a quick twenty bucks following the release of the Fed statement. Follow-through selling has persisted enough to trim another dozen bucks off the gold price. All that’s knocked hell out of the long-hoped-for rally that broke an intermediate downtrend line going back to the beginning of the year.

If bullion’s been wounded, mining stocks have been killed. Overnight, spot gold was off about 2.5 percent; gold producers, proxied by the Market Vectors Gold Miners ETF (NYSE Arca: GDX), nearly doubled metal’s losses.

Over the past month, a lot of folks gleefully bought mining shares, thinking the sector’s dirty laundry was finally washed clean and that the Fed’s rate-hiking hands were tied. If you looked deeply into the price patterns, however, you might have seen that the miners play was weak. Miners are often touted as leading gold. But the miners’ strength has been weedy compared to metal. See the chart below? A promising breakout in the stocks’ relative strength failed at the downtrend line. Does that mean mining stocks can’t break higher? No, but Fed messaging makes the odds longer. For now, anyway.

 

Click to Enlarge

 

Here’s the technical case for gold: the active Comex December contract retraced 50 percent of the January-to-July decline before falling back in mid-October. Yes, there’s an uptrend intact, as you can see in the chart below, but gold’s now churning in the lower half. The July-September support line has to hold to keep bulls’ hopes alive.  

 

Click to Enlarge

 

Brad Zigler is REP./WealthManagement's Alternative Investments Editor. Previously, he was the head of marketing, research and education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.

TAGS: Equities ETFs
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