Yellen Starts The Sellin’…

| March 21, 2014 | 0 Comments

Gold vs DollarJanet Yellen gave investors quite a surprise on Wednesday.  The Federal Reserve Chairwoman unexpectedly announced the US central bank is changing its stance on interest rates. 

As you may know, the Fed has repeatedly proposed they would adjust interest rates based on changes in the US unemployment rate.  For years, investors thought the Fed would raise rates when unemployment fell below 6.5%.

But that plan is apparently going out the window…

Ms. Yellen revealed in her first post-FOMC news conference that the first rate hike would likely come six months after quantitative easing (QE) came to an end. 

Given the current rate of tapering, QE will likely wind down in November of this year. 

And that means the Fed will hike rates around May 2015.  That’s a bit earlier than many analysts were planning on.

Upon hearing the news, commodity investors sent the precious metals complex lower.    

Take a look…


As you can see, gold (red line) and silver (blue line) responded to Yellen’s speech with losses of at least 2%.   Metal investors are clearly concerned about the possibility of rates rising sooner rather than later. 

Remember, since gold offers no yield, it typically suffers in a rising rate environment.

And that’s not all…

The green performance line in the chart above is that of the US Dollar.  With US rates rising, the Dollar will undoubtedly become a more attractive investment on the global scene.  Unless Yellen backtracks on her plan to raise rates six months after the end of QE, we could see some hefty gains for the greenback going forward.

And you know what that means…

Since the Dollar and gold typically hold an inverse relationship, further gains in the currency will likely add headwinds for the yellow metal going forward. 

If you’re heavily invested in gold and/or gold miners, what should you do?

Of course, one option is to sell your holdings altogether.  However, since there’s still so much uncertainty surrounding the Fed’s plan, that’s not the best course of action.  After all, Yellen may be forced to backtrack from her new plan at some point.

So instead of selling your gold, consider adding the US Dollar to your portfolio.  This allows you to hedge your gold holdings against further advances in the greenback.  And one of the easiest ways to do this is via the Powershares DB US Dollar Index Bullish (UUP).

UUP is a directly correlated ETF that tracks price movements in the dollar.  In other words, when the dollar rises so does UUP.

Bottom line…

Yellen started the sellin’ in the gold market on Wednesday.  But due to the overhanging uncertainty surrounding the Fed’s long-term plan, you shouldn’t sell your gold holdings just yet.   Instead, hedge your position with UUP.

Until Next Time,

Justin Bennett

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Category: Precious Metals

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.