Gold has historically rallied for at least 100 trading days after the first hike by the FOMC, but as HSBC’s Jim Steel explains, this time it could be longer. Steel sees three key reasons to remain bullish and forecasts USD1,300/oz this year (though warns that beyond that level, physical demand may weaken and help curb further rallies.)
Tightening and gold
Background: The end of the long-run bull market
A perceived change in Fed policy brought the most recent long-run gold bull market to an end. After 12 consecutive years of positive performance, gold posted its first year of losses in 2013. Gold entered a bear market in April 2013, when bullion prices collapsed more than USD100/oz over a two-day time span. Sensing a shift in Fed policy, investors began liquidating bullion in earnest in April. Gold lost almost 14% of its value within two days after unprecedented amounts of futures were sold short, triggering several stop loss limits that caused a further cascade of selling. Heavy gold ETF liquidation also occurred.
Fed policy perception played a key role in the selloff. In May and June 2013, expectations of a Fed tapering of its QE program led to rising real interest rates and falling inflation expectations that, in turn, set off more gold selling. By the time the market steadied – due almost entirely to unprecedented China-led emerging market physical buying as prices slumped – gold had declined by almost a 25% in the second quarter alone. Declines continued over subsequent months but at a more moderate pace. Nonetheless, the market remained on a downswing up to December 2015, when prices fell to a cycle low of USD1,045/oz.
This post was published at Zero Hedge on 03/23/2016.
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