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Gold's Fate is NOT in the Hands of the Federal Reserve

Case in point: The December 2016 comeback in gold prices

by Nico Isaac
Updated: February 03, 2017

Here we go again. On February 1, the U.S. Federal Reserve wrapped up its two-day Open Market Committee meeting on interest rates. And we braced ourselves for the inevitable fallout. Something that has a familiar acronym but stands for something very different: the FOMC, or Frenzy of Misguided Commentary.

It goes something like this:

Step One: The Fed hems and haws about whether or not to raise interest rates

Step Two: The mainstream financial analysts trace every subsequent market move back to the Fed's decision (or lack thereof).

Imagine a market's underlying trend as an ocean current. Events like the Fed's meetings on monetary policy are little ripples in that current. They can cause temporary lifts or blips; but they can't alter the direction of the main current.

The underlying trend -- in our opinion -- is driven by investor psychology, which develops as Elliott wave patterns directly on a market's price chart.

For a real-world example we rewind the clock to early December. At the time, gold prices were sinking to their lowest level in 10 months, while assets in bullion-backed exchange-traded funds saw their longest stretch of declines since May 2013.

And, according to many, gold's future rested in the hands of the upcoming December 13-14 FOMC meeting, for which pundits had factored in a 100% probability of a rate hike. Wrote one analyst:

"Gold getting hit from all directions as investors flee funds. Everything's against gold at the moment... as the Federal Reserve gears up to raise rates. Gold is highly sensitive to rising rates, which lift the opportunity cost of holding non-yielding assets such as bullion." (Dec. 10, Bloomberg)

Our December 12 Short Term Update described a very different future; namely, one in which gold prices were about to soar:

"Gold's downside is likely very minimal. Once it gets going to the upside, gold's initial target is the $1222-$1245 area".

On December 14, the Fed rose rates for the second time in a decade, all but sealing gold's bearish fate -- according to mainstream thinking, that is.

But, in our December 16 Short Term Update -- one day after gold prices made a low -- our analysis held firm to its bullish outlook:

"The Daily Sentiment Index (trade-futures.com) dropped to just 4% gold bulls... The last time there were 3% gold bulls was November 5, 2014, the day before a closing low and two days before an intraday low that led to a 16% rally to late January 2015.

"Traders are more bearish on a longer-term basis now than they were in July 1999, when gold was at $252.15, nearly $900 lower! This degree of pessimism usually attends the end of a decline and the start of a rally. It's tough to lean against a crowd, which is almost unanimously bearish gold. But that's exactly what our analysis suggests is proper at the current juncture."

From there, gold prices kicked into high gear, soaring straight into the $1222-$1245 target laid out in our December 14 Short Term Update.

And this is not the only example of the "disconnect" between interest rates and gold prices.

The Fed has maintained a near-zero rate policy for nearly a decade. By conventional logic, gold prices should have soared. And they did -- into their 2011 high, from where, despite unprecedentedly low interest rates, gold plunged by more than one-third; in 2013 alone, gold shed 28% -- in its sharpest annual loss since 1981.

The time for an independent perspective on the world's leading finanical markets is now.

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