Gold Bulls Rub Hands; Stock Bulls Wonder When It'll End
Below is an extract from a commentary available to subscribers at www.goldenbar.com on 30th June 2005.
Gold's resilience in the days leading up to the FOMC following on a 30 point three-week rally is as encouraging as it is interesting that such a rally would occur in the first place on the approach of just another tightening.
To be sure, the gold market has been rallying all through the rate hike campaign as you can see in the chart below. At first glance the bear might note that the Fed's rate hikes are finally having an effect.
Similarly, and as a result, the monetarist might suggest that it is time to stop hiking rates because of this effect and what it means - that the economy might be slowing. However, a closer scrutiny of the chart below will reveal that at first, the threat of FOMC action caused bigger consternation in gold prices than it does now.
The market rallied into the last three rate hikes whereas the first three (last year) saw anxiety reflected in the market on the approach (NOTE: the first rate hike was immediately preceded by a rally but I think that could be considered a bounce after the April/May lashing which occurred in the anticipation that the rate hike campaign would be underway soon. In any case it is noticeable no doubt in my articles around that time that I complained in response frequently often that gold bulls should not worry about a rate hike because it had already occurred).
By the summer of 2003 it became obvious that the Fed was ready to contemplate the return to a more "neutral" monetary policy, whatever it thinks that may be. There is a sharply distinguishable bottom in 10-year yields that occurred after the last rate decline in June 2003. The 10 year yield rose from 3.1% to 4.6% in two months - it has traded in a range of between 3.7 and 4.7 percent ever since (currently closer to 4 percent), which basically means that the bond market had by the middle of 2003 already discounted the 200 basis point rate hike that took the Fed another two years (plus) to actually complete. Yet gold kept on charging higher, though at an increasingly slower pace than other commodities. I believe it should have been charging faster in light of the likelihood that the Fed's tightening would be a lagging farce, which it has been by the way. So I take the recent action as especially encouraging given that we're finally looking ready to brush the Fed threat off!