Gold burdened as U.S. rate hike looms

This week is when the rubber meets the road after months – years, even – of qualified remarks, convoluted press conferences, and opaque policy statements: the Federal Reserve will finallyget on with it and raise its benchmark interest for the first time in almost a decade. Many in the market anticipate the pace of increases to be gradual amid concerns over tepid growth overseas and divergent monetary policies between the US and other nations. Bailing out of the market now or waiting to get in later may be costly.

It also sold $26 billion of six-month bills at an interest rate of 0.585 percent, the highest since 0.84 percent at a six-month bill sale on November 17, 2008.

But after the rough ride markets have had over the past year, one quarter-point rate hike is nothing to fear.

While a Fed action can still push yields higher, economist Victor Abola of the University of Asia and the Pacific said the effect is likely to be “minimal” as financial markets have already priced it in.

In our view, investors who say they’re waiting to see what the Fed does before they invest may be making a mistake. Two Republican candidates for President, Senators Rand Paul and Ted Cruz, have co-sponsored legislation that would audit the Fed and issued support for the more comprehensive Fed Oversight Reform and Modernization (FORM) Act of 2015 that just recently passed the House of Representatives. The central bank’s decision on the repo rate affects money supply, inflation, and the foreign investment scenario of the economy.

Higher rates could dent demand for non-interest-paying bullion, while boosting the dollar.

The commodity and credit-market wobbles added to analysts’ belief that “the Fed will try to mitigate the bitterness of a rate move with some dovish tilt to its tone”, said Aaron Kohli, interest-rate strategist at BMO Capital Markets, in a note. We’re not so sure-and we think moving to the sidelines now is a bad idea.

A prime example is Petrobas: US Dollar denominated debt makes up 70% of the total debt load carried by the Brazilian oil company now mired in scandal.

He continues: “How will higher US rates affect the USA economy?” Even with years to prepare, investors and stakeholders would do well to observe the gathering storm clouds on the horizon and take precautions.