Gold rallied about 2% after the rate increase announcement yesterday. The financial media believes that this was a typical “buy the fact” reaction. They are wrong.
Below is a daily chart of the GLD, the gold ETF.
Note that the December 2016 bottom was established two days after the last rate increase on December 14, 2016. But GLD fell nearly 3% in the two days following the announcement before bottoming.
This price action in gold has nothing to do with “buying the fact.” Some investors feel that the Fed is now behind the curve. I also believe that the probability of a mistake similar to the one committed in 1987 that caused the market crash is now higher. That probability is not very high but it is rising and as a result risk of ruin has increased.
However, history shows that Treasury bonds are a better hedge against a market crash. Gold is financialized to a large extent and may also drop during a rapid stock decline.
Therefore, both the financial media and uninformed gold speculators, who think gold is a good hedge against inflation and a market crash, are wrong. It is not the first time they are wrong. Actually, these two groups have certain traits that are indistinguishable.
If you have any questions or comments, happy to connect on Twitter: @mikeharrisNY
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