Login

Rates Up - Gold Up - Why ???

Share on Facebook Tweet on Twitter

Posted by Ross Norman - Sharps Pixley, London

on Thursday, 16 March 2017 09:56

To observers of financial markets it must seem odd that they often behave exactly the opposite to what is expected. Explaining it is also a strange thing too.

Essentially when the US Federal Reserve jawbones a potential move such as a rate hike (for the best part of a year), investor positioning is congruent with the expected outcome - that is to say dollar / equities up an by extension, gold down.

But what happens when they are too successful in leading the markets expectations and the market positioning is too extreme for the expected move. Well you have a heap of investors who are short gold and long the dollar / equities who don't get the win they expected... that is to say the move is over-priced into the news. As such, those investors - be they speculators in the futures markets or physical buyers who have forestalled their purchases for a hoped for price correction ... are vulnerable.

In this environment a little counter-intuitive buying of gold and selling dollar / equities is usually sufficient to frighten them into covering their position. In short, markets end up moving exactly the opposite way to how classic economics would tell us. And the move feeds on itself because of the extreme positioning. 

Evidence to support this view is gold's move over the last few rates increases - the 25 bps increase in December 2015 saw a subsequent 18% rise in gold over the following 3 months. Meanwhile the December 2016 rate rise saw an 8% increase over the next 3 months. Yesterdays rate rise has seen a 2.4% rise in gold so far ... and appears to be petering out. What this indicates is that the wonderful ruse by institutions who exploit predictable investor behaviour seems to be running its course.

So where do we go from here - well having been burned by behaving logically, presumably those investors who keep finding themselves "long and wrong" in dollar/equities and "caught short" in gold will be more perspicacious - a posh way of saying more wise and cynical. Ultimately we could just end up not listening at all.

Ross Norman

CEO

Sharps Pixley, London

https://www.sharpspixley.com/

...related, published prior to rate hike:

SWOT Analysis: How Will Gold React to the Next Rate Hike?


Free Subscription Service - sign up today!

Exclusive content sent directly to your Inbox

  • What Mike's Reading

    His top research pick

  • Numbers You Should Know

    Weekly astonishing statistics

  • Quote of the Week

    Wisdom from the World

  • Top 5 Articles

    Most Popular postings

Learn more...



Our Premium Service:
The Inside Edge on Making Money

Latest Update

To BEAT the market, you cannot BE the market.

Recently we attended an investor conference in Toronto. One of the questions we frequently get at these events is how many stocks one should...

- posted by Ryan Irvine

Michael Campbell Robert Zurrer
Tyler Bollhorn Eric Coffin Jack Crooks Patrick Ceresna
Josef Ozzie Jurock Mark Leibovit Greg Weldon Ryan Irvine