How Gold Reacted to the Interest Rate Rise

The rate-induced ‘crash’ already happened

Do you know, the Federal Book finally lifted its standard interest rate yesterday? Of course you realize this! This has got to be one of the biggest news in monetary media in 2015.

Prior to the rate hike, there were a lot of forecasts on the date and effect of the Fed’s decisions. From things i have seen, the immediate response to the rate hike has been very positive across all markets.

My own prediction was for that Fed to maintain interest rates at ‘zero’ until there is a meaningful base in the Chinese economy as well as commodity prices. I was incorrect on that…

However, my prediction around the reaction of the market was appropriate, at least for now. I believed that the marketplace would respond positively to the hike, because they would view it as a positive sign that the global economy is at a firmer footing.

Many believed the marketplace would respond very adversely to the Fed raising prices, because after all, QE and reduced rates have kept stock markets going strong. So the reverse would be true if accommodative monetary policy was to end.

I believed the market would have formed another expectation after receiving sufficient warnings from the Fed. However, I did believe the lack of stimulus would be the same as withdrawing support from the market.

The question now’s: will market rise or fall?

I am increasingly discovering myself to side with the actual ‘Bears’. However, I don’t think the marketplace will necessarily have a accident.

I have a feeling that the commodity collapse and the market slump in the past few months were the result of anticipating a rate take-off anyways. In another word, the fall already happened. It didn’t need to happen after the official announcement; it was already priced in to the market via expectations.

How regarding gold? Well, gold is a precious metal and it tracks the commodity basket. It is heavily affected by the energy price.

However, gold does tend to gain when markets see risk and ‘run for safety’. Not this time… the item collapse was itself the issue, and it kept gold low.

There was no new information in the market, we knew China was slowing, we knew the Fed would raise rates, we knew commodity deflation had not stopped. So, there was not enough of an emotional push to make the market ‘run’ for gold.

I ‘m anticipating a prolonged bottoming process within commodities as well as gold. This can easily see poor prices drag on well into the New Year.

Ken Wangdong+
Emerging Market Analyst, New Frontier Investor