Record Close in The Dow Pressures Risk-On Asset Class

September 22, 2018

New York (Sept 22)  Gaining 82 points on the day resulted in the Dow Jones Industrial Average closing at a new record high of 26,743.50. This is the second consecutive day in which the Dow traded to a new all-time high. This strong risk-on market sentiment coupled with dollar strength put tremendous downside pressure on gold pricing today.

Gold futures basis the most active (December 2018) Comex contract closed down $7.90 and is currently fixed at $1,203.40 per ounce. Spot gold also traded under pressure resulting in an $8.10 decline and taking current pricing once again below 1,200. Spot gold is currently fixed at $1,198.80.

According to the KGX (Kitco Gold Index), today’s decline is almost an equal mix of selling pressure and dollar strength. A strengthening U.S. dollar accounts for $3.75 with the remaining $4.35 attributable to selling pressure.

With the exception of silver, all of the precious metals traded under selling pressure today resulting in lower pricing. However, the industrial component of silver put any selling pressure at bay, with silver futures closing up 1 ½ cents and is currently fixed at $14.32.

Waiting on the Fed

Next week the Federal Reserve will hold this month’s FOMC meeting (Federal Open Market Committee) beginning on Tuesday and concluding on Wednesday. It is widely expected that the Federal Reserve will announce and initiate an interest rate hike at the conclusion of next week’s meeting.

One primary question in the minds of investors and traders is in regards as to whether or not there will be a further interest rate hikes this year either in November or December.

According to the CME’s FedWatch tool, there is a 93.8% probability that the Fed will raise interest rates by 25 basis points (1/4%) and a 6.2% probability that the Fed will increase rates by 50 basis points (1/2%). This tool also predicts a 91.4% probability that there will be another rate hike in November of 25 basis points, with an 8.5% probability of a 50-basis point rate hike.

Currently, the Fed funds rate (the rate that depository institutions charge to lend reserve money to other banks) is at 175-200 basis points (1 ¾% to 2%). Although the highest probability results in this rate growing to 200-225 basis points, there is a remote possibility that this rate could go as high as 250 basis points by the end of the year.

We can expect the investment community at large to have a wait-and-see investment demeanor at least until Wednesday when the FOMC meeting concludes, and the Federal Reserve releases its monetary policy statement.


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