Gold Began November Like a Lamb but May End Like a Lion

There is a proverb about the weather in the northern hemisphere as each year winter transitions into spring. The proverb says that “March comes in like a lion and goes out like a lamb”. While the proverb began as a reference to astronomy, referring to the position of the constellations Leo-a lion, and Aries the ram, it eventually evolved into a summation about how typically March is the month when the Winter season ends and Spring begins.

Based on recent events involving the Federal Reserve we could extrapolate that in November gold began like a lamb with a declining price and looks like it could end like a lion. Gold, certainly looked as though it began the month of November and continues to trade under pressure to lower pricing.

Actions by the Federal Reserve certainly took on an aggressive hawkish stance when on Wednesday of this week the Fed concluded its November FOMC meeting and as expected raised their benchmark rate by 75 basis points for the fourth consecutive time.

This takes its fed funds rate to between 375 and 400 basis points. The net result was an extremely volatile day in gold with the most active December contract trading to a high of approximately $1673 a low of $1637.80 closing almost exactly where it opened at $1650.

During the press conference held a one-half hour after the meeting concluded Chairman Powell made it clear that the “ultimate level” of interest rates would likely be higher than previously thought adding that he believed that the window for a soft landing has significantly narrowed.

The Dollar Has a Significant Decline in Value and Gold Has an Exceedingly Strong Gain

The idea that gold would have tepid in meek performances characterized by trading sideways or losing value was put to rest at least for today after the U.S. Labor Department released its nonfarm payroll jobs report today.

The report revealed that the U.S. economy is strong gaining 261,000 new jobs in October. The actual numbers came in well above estimates by the Wall Street Journal forecasting that only 205,000 jobs would be added last month. However, the report also showed a dramatic uptick in the U.S. unemployment rate now at 3.7%.

And it was the rising unemployment rate that was the underlying force that broke the downward momentum of gold and the upward momentum of the U.S. dollar because it spurred the belief that the exceedingly hawkish monetary policy of the Federal Reserve might begin to enter a new slower pace of rate hikes.

The U.S. dollar had significant declines totaling 1.92% with the dollar index currently fixed at 110.64. But it was gold and silver that had a stellar performance today with gold gaining 3.12%, resulting in a $50.80 gain in the most active December contract which is currently fixed at $1680.20. December silver shined even hotter gaining 7.64% and after factoring in today’s gain of $1.485 is now fixed at $20.915.

This change in market sentiment is reflected in the CME’s FedWatch tool which predicted a 35.2% probability that the Fed’s benchmark rate would be between 425 and 450 basis points one month ago on October 4. Currently, this probability indicator suggests that there is a 61.5% probability that by the end of 2022 benchmark interest rates will be between 4 ¼% and 4 ½%.

However, expectations that the Federal Reserve will slow down the magnitude of the upcoming rate hikes do not suggest that the Fed won’t take interest rates higher. It is been suggested by economists, analysts as well as Federal Reserve members that it is realistic to anticipate that the Fed’s benchmark rate will move as high as 5% to 5 ½%. It is widely accepted that market participants are already beginning to factor rates at 5% or higher into current pricing.

But Wait There’s More

Lastly, there is an upcoming report that could easily have significant input on the Fed’s decision in December and that is next week’s CPI inflation report. On Thursday, November 10 the Bureau of Labor Statistics will release its most current data on “headline” inflation or the Consumer Price Index.

An article titled, “Octobers CPI number could be significantly lower than expected” in Forbes magazine today estimated that the CPI inflation index could easily decline by a small amount from September’s 8.2% year-over-year to 8%. This is based on the Federal Reserve bank of Cleveland’s “Inflation NowCasting”.

If we do see a small decline in inflation next week that could propel gold to move past its current resistance of $1685 taking the precious yellow metal to challenge $1700 once again.

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Wishing you as always good trading and good health,

Gary S. Wagner