How Will Gold React to the Federal Reserve?

Now that we have that out of the way let’s talk.  Your friendly Gold Enthusiast has not been a fan of the timing of interest rate changes by the Fed.  In his opinion, the Fed raised rates about 2 years later than was prudent. After all, isn’t the best advice to save when you’re making money, so you have something to spend when your income dries up?

What the Fed effectively did was feed the biggest bull market in US history with artificially cheap money. We all love a good bull market, for sure.  But really – keeping the base rate at 0.25% 7 years into a bull market is a bit excessive. And then strangely, when the Fed finally did decide to raise rates – amidst screams and gnashing of teeth by many – the bull continued upward.

At some point, you have to acknowledge reality, whatever its form. When things are going well you need to look around and say “Hey, things are pretty good!” rather than pout and complain about how much you’re not making. Markets need adults to work well, not spoiled teenagers.

What happens when you spoil a teenager is the threat of any action becomes less and less effective over time. And as much as economists like to write equations and build charts, very few of them are successful market traders – because the markets depend in a very large part on human psychology. If it was all measurements and equations everyone could be hugely successful traders, which obviously isn’t the case.  (That’s why they call them brokers not richers, as we used to joke in business school.  Get it?  OK, moving on…)

So here we are with the Fed perceiving a threat to US markets from overseas markets.  And, given that they only have 2 measures they’re supposed to “control” – inflation rate and employment rate – it’s convenient that the highly-jiggered inflation rate they watch is ever-so-slightly below the target range.  For like, a week.

Oh My God, we have to act now, can’t you just hear the Fed members thinking!

Your friendly Gold Enthusiast believes the Fed will lower their base interest rate by 0.25% to help prop up the markets.  Because what teenagers really need is more cheap money.  The market reaction will be interesting to watch.  Will stocks go up because Hurray, the Fed is riding to the rescue?
Or will it drop because Oh My God, if the Fed is taking action they must see a REAL problem out there, so head for the hills?  The old Stop, Drop, and Roll advice – as teachers tell kindergarteners in fire drills – seems strangely appropriate here.  (You saw it here first!)

This Gold Enthusiast believes a Fed interest rate drop will be good for gold.  Right now it might just help gold hold above the 1500 support level. But in weeks to come, staying above 1500 will help build the start of the next gold rush. So we’re not making any new trades based on this announcement, and we’re certainly not getting out of any.  Hold your ground and see what happens next is our best advice right now.

Signed,

The Gold Enthusiast

DISCLAIMER: The author has no position in any mentioned security.  The author is long the gold sector via positions in NUGT, JNUG, a few junior miners, and covered calls on parts of the NUGT and JNUG positions. The author does not expect to make any new trades in the next 48 hours for reasons discussed in the article.

S&P 500 Index ( .INX) was trading at $300.34 per share on Wednesday morning, down $0.58 (-0.19%). Year-to-date, .INX has gained 13.00%, versus a % rise in the benchmark S&P 500 index during the same period.