Wednesday August 24, 2016 17:48

Fed Chairwoman Janet Yellen’s speech in front of important central bank executives from around the world is fast approaching. The long shadow of Friday’s address at Jackson Hole prompted gold investors to move off the sideline and, unfortunately, do some selling.

That is expressive of a mindset that says Yellen is going to indicate rates will be rising sooner rather than later. However, we’re not so sure. Yellen, like most Fed chairmen before her, sticks to the scripts of the previous meetings’ minutes. We also think she will address the interconnectedness of the world’s finances, and how the goal should be to get the three or four major economic power-centers to run hot at the same time.

We’re also not sure how much a quarter-point increase in baseline interest rates in the U.S. will change the demand for U.S. government bonds, which theoretically would attract money at the expense of gold or silver.

Today’s decline in gold goes along with a reciprocal rise in the dollar, which makes gold cheaper, of course. However, there were other bearish overtones that affected today’s precious metals trading.

West Texas Intermediate crude was off by as much as 3.00%. It has been struggling to recover a bit in mid-afternoon trade. A robust 2.5 million-barrel increase in inventories unsettled prices. We were expecting a 450,000-barrel drop. Brent North Sea was down significantly, but by “only” 2.00%.

According to the Energy Information Administration (EIA), gasoline stocks were up by 36,000 barrels, compared with expectations among experts for a 1.2 million-barrel drop. Distillate stockpiles, which include diesel and heating oil, rose by 122,000 barrels, versus expectations for a 400,000-barrel increase, the EIA data showed.

Forget price freezes or price setting by OPEC and OPEC-affiliates. Oil is going to remain a problem child for a long, long time. Any reasonable uptick in crude prices will bring U.S shale oil roaring back into the marketplace. That would happen around $55 to $60 per barrel.

Equities traded lower on the air of pessimism that surrounds the potential fallout from Yellen’s speech coming up on Friday. The worry is that she will signal higher rates and that will put cheap money for investors in jeopardy.

The NASDAQ, in particular, saw some potshot profit-taking, which was based on squaring up and closing down (already!) for the weekend. In truth, there is very little news and the volatility index (VIX) is extremely stable, up off its 30-day low but well within its 60-day range.

One last citation of an index: the CME FedWatch probability of a Fed rate increase at the September meeting is about 18%. On today’s book, the probability for a hike in December is 40%.

For those who would like a deeper analysis, I invite you to try our daily video newsletter. Simply use the link at the bottom of this report to sign up for a free trial.