Gold Forecast: Caution Advised After Fed Meeting

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On the heels of the Federal Reserve’s most recent ¼ point interest rate hike on Wednesday, gold and the precious metals complex have seen a negative bearish reversal that deserves caution over the short and intermediate term.

Fundamentally, the interest rate hike and accompanying policy statement, which indicated that the Fed would begin to taper down its balance sheet over the coming year, was interpreted by the market as supportive for the US dollar and negative for gold. As precious metals investors, we know that the Fed has already printed nearly $4 trillion dollar of fresh liquidity in support of the financial system over the past decade, and that the feasibility of the central bank reducing this liquidity by any significant amount is doubtful. Yet what is important over the short run is not so much our fundamental beliefs – but rather how the market itself is reacting.

For example, those who ignored the actual response of the gold market in 2011 suffered severe losses as the precious metals declined through late 2015. All the while, the Fed continued to print money. The market can move contrary to perceived fundamentals for many years. Caution is again advised at this juncture.

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Key Ratio Hints of Gold Price Breakout

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Gold prices remain in a mid-cycle consolidation after the strong advance seen in first-half 2016. Seasonal influences are shaping up for strength by August and September. The gold to silver ratio looks to have topped, signifying an important low across the sector. Precious metals investors should continue to monitor the ratio as a leading indicator, which will give us hints as to the direction of gold’s pending breakout when it occurs later this year.

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