Gold Correction Likely Not Over

As I stated last week, I am waiting for the gold correction to end so I can increase my holdings of gold and gold shares. I don’t think we’re there yet.

Last Friday, the gold price soared $33 after the stinky jobs report released that morning. The thinking was that the Fed would not be raising rates and the dollar would therefore fall and gold’s correction would be over. And that is exactly what happened…for one day.

The Fed Funds Futures (FFF) immediately got to work discounting Fed rate hikes for both the June and July meetings. The FFF market was assigning a greater than 50% probability of a June or July Fed rate hike prior to Friday’s employment news. By the end of the day on Friday, the odds had fallen to roughly a 30% probability for a June or July Fed rate hike.

Since there are FOMC meetings scheduled for June and July but not for August, the performance of the August, 2016 FFF contract tells us the odds that the market is assigning to a Fed rate hike in both of the next two FOMC meetings. The chart shows that, in reaction to Friday’s weak employment data, the price of the August FFF contract rose by 0.09, which means its interest rate fell by 0.09%, from 0.54% to 0.45% (the interest rate implied by a FFF contract is 100 minus the price).

ZQQ16 - 30-Day Fed Funds - Daily OHLC Chart

But on Monday, gold’s advance hit a wall just below the 50 dma. For the first time in weeks, GLD, the big gold ETF, actually sold a little gold. In her Monday speech, Chairman Yellen assured us that the poor jobs performance was transitory and the economy is stronger than it looks. This morning, gold is down a little, having completely lost its Friday mojo.

What happened on Friday? It’s starting to look like fool’s gold, a case of premature excitement. Open Interest on COMEX was up 3% on Friday indicating lots of new buyers came into the market after the price took off on an initial burst of short covering. Many of these buyers are now looking at losses.

I’m betting that the most likely real end to the gold correction is after the FOMC meeting on June 15 when Chairman Yellen downgrades the U.S. economy yet again. But as always, the key is just to watch the market and let it tell you when the correction is over.