Blanchard: Fed overselling rate hike great for gold

On Wednesday, weakness returned to the gold market with the metal retreating from four-month highs hit a week ago as traders position themselves ahead of two crucial central bank meetings.

On the Comex market in New York, gold futures with December delivery dates traded down just under 1% or $10.80 at $1,166.70, not far off the day's lows, in busy early afternoon dealings.

Last week gold hit its highest level since June 22, amid fresh indications that a far from robust US economy may push the first rate hike in nine years further into the future. Gold remains up some 5% from where it was trading before the US Federal Reserve at its September meeting decided not to lift rates from near-zero, where it has been since the global financial crisis.

Interest rates have a strong negative correlation to gold and the relationship has only gotten tighter since the 2008/09 crisis. The underlying reason for the relationship is that as yields rise the opportunity costs of holding gold increases because the metal is not income producing. Higher rates also boost the value of the dollar which usually move in the opposite direction of the gold price.

The Fed meets again next week to make a rate decision, while the European Central Bank is expected to announce the continuation of its program of quantitative easing on Thursday. Should the Fed raise rates, or even just strengthen the case for a rise next year, and the ECB keep printing money the way it has it would give a fresh boost to the dollar which strengthened again on Wednesday for an 11.5% gain over the past 12 months.

Anthem Blanchard, CEO of online gold and silver retailer Anthem Vault, tells MINING.com at the moment the gold price seems to be caught in the stronger dollar-higher interest rate expectations narrative:

"Given that we're seven years into a natural business upcycle the US economy should be going gangbusters right now. With the economy still so weak, maybe the question should be asked: Are interest rates still too high?

"With the Fed essentially rolling over the massive amounts of credit already in the system, even a modest rise in interest rates will quickly make servicing that debt too difficult. That creates the potential for real gyrations in markets and a catalyst for gold and silver."

Blanchard, an ex-director of European trader GoldMoney and scion of James U. Blanchard III, who helped restore Americans' right to own gold 40 years ago, adds that negative real interest rates and nominal rates near zero will continue to drive the gold price:

"The Fed has really sold the rate hike hard, but with every postponement more questions are being asked about the Fed narrative. Where is the definitive result?

"Central banks can only use monetary policy for so long, to stave off another credit contraction. I see another great credit contraction within 15–18 months and a significantly higher gold price in three years."