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Gold Prices, Rate Hikes and the Placebo Effect

On October 28, “market fundamentals” pointed down in gold. And yet, the yellow metal soared. Here’s why

by Nico Isaac
Updated: November 01, 2016

You know those buttons you push at crosswalks? The one’s you thought sent a message to traffic lights to stop and allow pedestrians to walk across the street.

Well, according to a 2015 BBC article, those buttons do nothing of the sort. Called “placebo buttons,” they “provide no control over a system” other than giving the user “the illusion of having an effect.”

In many ways, it reminds me of a core tenet of mainstream financial wisdom; namely, that events outside a financial market, called “fundamentals,” are the so-called “buttons” which signal to prices which way to move. Simply,

Negative news events signal a red light to prices, while positive news events send a green light to go higher.

We believe, however, that these fundamental “buttons” are little more than a placebo, which have demonstrably little – and, often, no control -- over the system of market trends.  

Take, for instance the recent price action in gold. On October 27, gold prices eased from a three-week high, and according to many mainstream thinkers, one single fundamental “button” was in control of gold’s near-term future – expectations that the Federal Reserve would raise interest rates at its next monetary policy meeting.

This rate hike button apparently sent a clear, unmistakable sign to gold investors: Do Not Cross into bullish territory. Here, these October 26-8 news items stand the bearish ground:

“Gold price fall as concerns over an interest rate hike weighed on demand. Traders are pulling back bids to wait and see what will happen for now.” (Dow Jones Newswire)

“Gold back on the defensive as data showed the pace of U.S. economic growth picked up sharply in the third-quarter, boosting chances of a rate hike before the end of the year.” (Mining.com)

“The likely higher interest rate environment and the consequent firmer greenback should underpin a bearish case for gold.” (Economic Times)

“We think gold will have a difficult time overcoming the dual headwinds of a buoyant dollar and rising rates.” (MarketWatch)

Gold prices continued to fall, right? That’s what you’d expect to happen if the Fed hike “button” was pressed.

Actually, on October 28, gold prices soared in a powerful $30-plus/ounce rally into November 1.

The “Fed” fundamental button had no effect, which begs the question – what caused gold prices to rally?

Well, before you say “Clinton Scandal” – as so many pundits willingly did --

“Gold Pops Higher on News of Clinton Investigation” (Oct. 28 Wall Street Journal)

Here’s something to consider:

Yes, the Clinton/FBI news was a surprise, and it’s easy to put down the rally in gold that day to that event. However, there was one indicator that was already pointing higher in gold – well before the Clinton news hit the newswires. (news of FBI director James Comey’s letter to Congress was released at 1:30 pm, according to an October 28 New York Times timeline)

On the morning of October 28 (at 9:53 a.m.), before the Clinton news went viral, just as gold was warming up to the upside, our Metals Pro Service identified a (c) wave advance (as part of a larger double zigzag Elliott wave pattern) underway on gold’s price chart and wrote:

“Gold is probably rising in wave (c) of a second zigzag correction up...

I want to give price a chance to recover and push to new highs.

“The outlook is bullish to the 1290-1295.50 area while price holds above its Fibonacci 0.618 retracement level - now at 1270.94.”

The next chart captures the strong upswing in gold since then:

So, placebo, another Clinton investigation -- or a bullish Elliott wave pattern?

Where gold prices go from here may depend on the expectations of rate hikes to some degree -- but it’s worth paying attention to Elliott wave patterns which emerge on gold’s price charts. 

Next Time Gold & Silver Prices Surge, Will You Be Ready?

You can be. Daily -- even intraday! -- Metals Pro Service forecasts keep you ahead of trends and help you make informed trading decisions in precious metals, aluminum, copper and more.

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