The move lower in the gold price last week has come about as a result of better economic data coming out of the US.
This better economic data has increased the probability that the US Federal Reserve will increase interest rates by 0.25% perhaps as early as December.
Higher US interest rates implies a higher US dollar which leads to weaker gold. The fall in the gold price is the market pricing in the probability of the US Federal Reserve making the first interest rate increase in many years.
US Economy Improving
Higher interest rates in the US suggests the US economy has finally recovered. The data I look at confirms the US economy is in pretty good shape and interest rate increases are justified if not overdue.
Interest Rates in Australia?
What will be fascinating to watch in the months ahead is to see if the bottom of the interest rate cycle in the US flows around the world and if that indeed means that the bottom of the interest rate cycle in Australia is imminent too.
One of two scenarios for the stock market
The natural reaction for asset prices such as the stock market is for a move lower opposite increasing interest rates.
However, the opposing view is that this bodes well for stock markets as a better US economy means businesses and consumers are doing better and this could translate into higher share market prices over the next 12 to 24 months.
Do you have a plan?
Either scenario is out of our direct control but what we can control is having a flexible plan in place to respond to either scenario.
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