The golden question: Buy or sell the rate cut?

Posted by Cam Hui - September 17, 2025

Mid-week market update: Scheduling notice – I will be traveling for the next 10 days. Barring wild market volatility next week, there will be no mid-week market update next Wednesday, but regular commentaries will be published each weekend.

It’s always tricky to write a market commentary on the day of the FOMC meeting, as price moves can be quickly reversed the next day. Coming into the meeting, the market was expecting a quarter-point rate cut, and there were even whispers of a jumbo half-point cut.

A useful barometer of Fed policy from a cross-asset perspective is gold. Gold recent staged an upside breakout to an all-time high. While it’s sensitive to many factors, such as unexpected inflation and geopolitical risk, it’s also sensitive to changes in real interest rates.

The Golden Monetary Policy Barometer

The accompanying chart shows the relationship between real 1-month interest rates (blue line, inverted scale) and gold mining stocks (red line). Gold prices tend to rise when real rates fall. That’s why the current sentiment backdrop of expected rate cuts has been bullish for gold and gold mining stocks.

While this is a case of observing the tail that the dog is wagging, but
gold miners are extremely overbought on a number of indicators, which
implies that rate cut expectations may have become overly ambitious. The gold miners (GDX) has well outrun its rising trend channel. It’s also extremely overbought on the 14-day RSI, and the GDX to gold ratio is surging.

Conditions are setting up for a pause in the gold bull. SentimenTrader observed that only 10% of gold miners are in correction. If history is any guide, “the 3-month win rate [for GDX] was just 27%. That’s a warning sign for gold.”

I would note that, in the aftermath of the Fed’s interest rate decision, both gold and Bitcoin prices pulled back.

The Stock Market Outlook

This brings us back to the stock market. Trend following CTAs are already at a maximum long position in equity exposure. Any signs of a significant pullback would set off a selling stampede.

The combination of an extended condition in gold and gold miners and CTA crowded long is a setup for a “sell the news” equity pullback. But the S&P 500 only fell -0.1% and the equal-weighted S&P 500 exhibited a doji candle, which is a sign of indecision, though the % above the 200 dma breadth indicator is weakening.

The market action on FOMC days are often confusing. I will be looking for confirmation of market weakness (or resilience) in the next few days. Stay tuned.

1 thought on “The golden question: Buy or sell the rate cut?”

yodoc2003 says:

September 17, 2025 at 2:12 pm

The rate cut was so expected, and the S&P relentlessly higher. If no meltup occurs soon, enthusiasm might fade. Besides we are due for some kind of correction. Where is Tariffman? The nvda news not setting him off? Maybe he and Jay Pow are having a honeymoon period over the rate cut.
Anything is possible, but like Boxing Day follows Xmas, how hard will they celebrate a 1/4 point cut?

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