Rates Up—Gold Up—Why?
Financial markets often behave exactly in opposition to what is expected. Essentially when the Fed jawbones a potential move such as a rate hike (for the best part of a year), investor positioning is congruent with the expected outcome: That is to say, dollar/equities up and by extension, gold down.
But what happens when they are too successful in leading the markets expectations and the market positioning is too extreme for the expected move. You have many investors who are short gold and long the dollar/equities who don’t get the win they expected; the move is over-priced into the news. Those investors are vulnerable.
In this environment a little counter-intuitive buying of gold and selling dollar/equities is usually sufficient to frighten them into covering their position. In short, markets end up moving exactly the opposite way to how classic economics would tell us. And the move feeds on itself because of the extreme positioning.
Evidence to support this view is gold’s move over the last few rates increases – the 25 bps increase in December 2015 saw a subsequent 18% rise in gold over the following 3 months. Meanwhile the December 2016 rate rise saw an 8% increase over the next 3 months. Last week’s rate rise has seen a 2.4% rise in gold so far, and appears to be petering out. What this indicates is that the wonderful ruse by institutions that exploit predictable investor behaviour seems to be running its course.
So where do we go from here? Having been burned by behaving logically, presumably those investors who keep finding themselves ‘long and wrong’ in dollar/equities and ‘caught short’ in gold will be more cynical and wise.