Ahead of the May decision on monetary policy from the U.S. Federal Reserve, I concluded that the stars had aligned for a potential (sharp) relief rally for the SPDR® Gold Shares (NYSE:GLD) and the iShares Silver Trust (NYSE:SLV). In that post, I extrapolated from the market’s waning enthusiasm for two more rate hikes in 2017. I was thoroughly punished for trying to over-anticipate the Fed’s next move!
To my surprise, the Fed stood solidly behind the current rate hike momentum by dismissing current weak economic data as “transitory”:
The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term.
The market got the message. The odds for a rate hike in June strengthened further. The odds for two rate hikes by December increased to 55.8%. (Note that with the May results known, the current odds are not quite comparable to the odds I reported ahead of the Fed).
The market is locked into a June rate hike.
Two rate hikes by December looks a little more certain after the Fed May decision.
The changes look small, but they were enough to help smash GLD and SLV. GLD sliced right through its support at its 50-day moving average (DMA) with a 1.4% loss. SLV lost a whopping 2.2% on its way to a record 13th straight down day.
The SPDR Gold Shares (HK:2840) broke down below 50-DMA support. The March low, where the Fed last hiked interest rates, is now in play.
The historic plunge for the iShares Silver Trust continued as nothing seems to abate the persistent selling.
The pain for GLD and SLV was a gain for the U.S. dollar index. The dollar traded away from the edge of a major 200-DMA breakdown and even closed higher than the previous 7 trading days, which also featured tests of 200-DMA support.
The Fed apparently helped the U.S. dollar index come alive again. The dollar jumped off 200-DMA support and suddenly no longer looks ready to breakdown…just yet.
My pre-Fed trade to increase longs in GLD and SLV was worsened by the surprisingly weak performance of my hedge with put options on the iShares 20+ Year Treasury Bond (NASDAQ:TLT). While TLT did decline post-Fed as I would have expected given the market’s reaction to the announcement, TLT started out the day with a gap up and finished the day with a fractional gain. I would have expected TLT to decline by 1% to 2% given the big moves in precious metals.
The iShares 20+ Year Treasury Bond managed to close flat on the day despite the big moves in other rate-sensitive plays
Now I will just observe the ultimate depth of the slides in GLD and SLV. Speculators in futures contracts in gold and silver have been caught rowing against the tide, so I cannot use their trades as a functional signal for now. Instead, I will revert to the old rules on trading a bottom: celebrate with the buyers and do not argue with the sellers.
Be careful out there!
Full disclosure: long GLD shares and call options, long SLV shares and call options, long TLT put options, long and short various positions against the U.S. dollar