Gold price fell to $1,808 an ounce in the wake of the release of the minutes of the December Federal Reserve meeting, having hit an intra-day high of $1,829. Silver price fell to $22.72 an ounce from an intra-day high of $23.26.
Gold and silver have continued to sell off this morning with gold trading as low as $1,794 and silver trading down to $22.14.
The FOMC minutes showed a much more hawkish Fed than markets had been expecting.
The minute suggests that the Fed could be very aggressive in reducing their $9tn balance sheet.
They specifically highlighted their concerns with inflation (no longer transitory).
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The minutes did not put any timeframe on when they might begin this reduction. However, they are not scheduled to stop buying assets until February.
The speed with which they are expected to hike rate also looks to be quickening too.
More Aggressive Tightening and Massive Rate Hikes
Comments in the minutes are suggesting the possibility of much faster rate hikes with markets now pricing in a better than 75% chance of the first hike in coming in March of this year, just 2 months away.
They are also pricing in a 60% chance of a second rate hike in June. Also, an over 50% chance of a third in November.
December interest rate futures are even showing a 40% chance of a 4th in December.
There were only some hints as to when The Fed might begin the reduction of its balance sheet and how it might achieve this, with some officials preferring to rely more on balance sheet reduction than rate hikes to remove excess monetary accommodation.
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This would suggest a faster pace of assets shedding than previously thought.
Whatever the pace ends up being, it will be faster now than in 2015. Also, when The Fed hiked rates and waited 2 years to stop buying assets and begin the reduction of their balance sheet.
It is reasonable to think that The Fed would do it this year even by summer if committee hawks have their way.
In the wake of the release, the yield on the US 10 Year Treasury Note rose to 1.726%, levels we haven’t seen since January 2021.
Equity markets fell heavily because of the more hawkish tone and the fear of investors that the easy-monetary-policy-punchbowl is about to be taken away.
The Dow closed at 36,407.11 down 392.54 points or down 1.07%. The tech-heavy Nasdaq fell 3.34% to 15,100.17, a fall of over 522 points.
All major European markets have also opened weaker, taking their lead from the US.
This Will Effect Us All
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Investors will watch nervously today to see if there is more downside potential for stock markets that have been on a stellar multi-year bull run.
Markets are well overdue for a correction. However, market watchers will be looking to see if a significant sell of in equities softens the hawkish tone of the Federal Reserve or whether they really do have the ability to fight inflation head-on.
A deeper correction in the equities could cause them to blink!
The correlation between precious metals and equities in the very short term is quite strong. Also, if we see a deeper sharp correction in equities, then we can expect gold and silver to follow them lower initially.
Support for gold in the short term is at $1,788, with a breach of this opening up a retest of the December low at $1,770 and the September low at $1,727 beyond that.
Silver will find good support for a daily close at $22.15, with a breach of this potentially targeting the support zone at $21.45/50.
Both are looking over-sold at the moment, but the developing equity story may continue this trend but only in the very short term.
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