The FOMC elected to hold rates steady yesterday to no one's surprise, but their forecast still calls for one more hike this year and three next year in addition to a $10 billion per month reduction in the balance sheet (currently around $4.7 trillion).

The odds of a December hike as priced by Fed Funds Futures ripped from 47 to 68 percent immediately, rates popped, the dollar strengthened and gold sold off. Interestingly, equity markets recovered all of their initial selloff.

Gold has now clearly broken out of the up-channel dating back to July and is still a crowded long market. Vols, as usual, have gotten absolutely crushed in precious on the move back below $1,300. Three-month at-the-money vols are looking to trade below 11 percent.

One wrinkle to note is that the Fed's slight bend toward hawkishness without inciting another temper tantrum will allow other central banks to move toward normalization, especially the ECB. A coordinated move higher in global interest rates would portend pain for metals, but the back-end risk is that rates could derail the global economic recovery. The Norwegian Central Bank even took the opportunity overnight to indicate higher anticipated rates coming.

Put simply, no one wants to be seen as the most hawkish CB, so a little breathing room from Fed rates could change the paradigm a bit.

Bull Case

  • The pullback could be an opportunity for those looking to add long-term exposure below the $1,300 mark.
  • Headline risk is usually risk-off. There are plenty of things to fear geopolitically, but none has come quite true yet.
  • Low global vol could contribute to risk-haven seeking when we do finally get a headline worth acting on.
  • Commodities broadly seem to be rotating back into favor for macro-oriented traders.
  • Despite recent hawkishness, rates are still broadly below long-term averages, and the probability of a 4 percent-plus 10-year remains low. Opportunity costs minimal.
  • Support from the 50 DMA at $1,288.50 currently (spot).
  • Correlations have been changing some since yesterday, so perhaps higher rates not necessarily a death-knell for gold. Maybe an inverted yield curve is coming?

Bear Case

  • 4x 25bp hikes in the next 12 months is significant as it would represent a doubling of Fed's key rates.
  • $10 billion per month is a paltry reduction in the Fed balance sheet, but it's the change in trajectory that is key.
  • Plenty of room below to the $1,267-1,245 for 100- and 200-day moving averages.
  • EFP being priced at fair value is indicative that there is likely a good slug of spot longs in addition to crowded long futures market. No disconnect.
  • Broken the up-channel that started in early July. Gold likes to trade in 60- to 100-day cycles for whatever reason, so we could be in for lower or sideways for a bit.
  • Gold and silver both struggling to regain significant $1,300 and $17 levels.
  • Physical sales for September are atrocious. 125,000 total silver eagles so far for the month puts us in territory to look at worst monthly totals since 2003. This drop likely helps some.
  • Futures are still incredibly crowded. We estimate only some 2 percent of total open interest has come off in the last several days, and we are nearing cost averages, so traders may be quick to defend profits.
  • Expect GLD holdings to rollover with the 40-day moving average in the next week to 10 days.
  • VIX just dropped back below 10 percent for equity.

Chart 1

Silver eagle sales are looking historically bad. The horizontal white line is current projection for September monthly sales. Depending on the next week of sales, we could expect it to be the worst (non-December) month of sales since at least 2008 and maybe even 2002.

Gold new coin sales are on the lower portion and aren't looking much better. Physical demand is a great indicator historically of a fundamental, sticky demand that tends to be less volatile than electronic exchanges. Unfortunately, this is not looking good.

Chart 2

I saw this chart on Twitter (@HayekAndKeynes), so I can't take credit for the idea, but the gist is that housing (blue) and medical care (green) have been by far the largest drivers of consumer inflation.

Interest rates can only really affect the housing market, so this could explain some of why the Fed continues to remove accommodation while prints are below long-run averages. If, however, higher rates choke off new builds, you could coincidentally see less supply coming into the market and drive higher costs. Rock and a hard place.


Theresa May is scheduled to give a major speech tomorrow delineating specific proposals to ease the Brexit process. Somewhat ironically, one of those is expected to be a €20 billion payment to the EU, which is pretty much exactly against the spirit of the initial Brexit vote.

Also, I made an entire note without mentioning any actions from the current administration, I view that as progress ...

Coin Toss

I understand the general level of nervousness in the macro environment with markets continually making new highs, but the underlying fundamentals for metals (if there is such a thing) of rates, physical demand, positioning and technicals all point towards further pain. We aren't yet oversold, so we expect lower trading.