By Mike McGlone, Special Contributor to Kitco News
Wednesday May 25, 2016 08:28
(Kitco News) - Higher rates, higher stocks and a strengthening US Dollar if sustained, is an unlikely combination for a higher US dollar gold price. The breakout on the upside in the stock market so far this week is a green-go for the Fed to tighten, possibly as soon as the June meeting, currently priced near a 1/3 probability in Fed Funds Futures. If the stock market sustains Tuesday’s gains, the May unemployment number next week, will likely need to be rather weak to curtail tightening. The sustainability of increasing Fed tightening expectations, higher stock market levels and the strengthening US dollar should be the key determinants of the US dollar gold price, currently on its way to test $1,200/oz. support.
Gold, silver and US Treasury bonds have shown significant divergence in 2016. The good news is gold is well above $1,100/oz. which was resistance in the first week in January, the last time the 12th Fed Funds future was at current levels. Fed Funds futures are indicating an effective rate near .87% a year from now. The situation is similar with stocks. They have diverged so far in 2016; gold is up 15% Vs the S&P 500 up near 2%. Year-to-date, along with gold and silver, the US Treasury bond market remains among the best performing investments, up 8.6% as measured by the TLT ETF (featured chart). Are these markets telling us something, or are they off base? Contrary to the Fed and most economists, based on the noted YTD positive returns, the gold, silver and the US Treasury bond markets, appear more concerned about deflation and the risks of increasing market volatility. Maybe we will get lucky and the stock market will resume providing the above average historical returns similar to those spiked by QE3, thus benefitting most investors and the general wellbeing. When the history of 2016 is written, if those investors that diversified portfolios with overweight positions in gold, silver and treasury bonds end up underperforming some, due a strong stock market, we are all probably better off. As we reach the official beginning of summer this weekend, the against the consensus crowd, clearly has the upper hand.
US Treasury bonds remain among the best performers despite Fed tapering and tightening