- The ECB pushes the Fed to lower rates
- Gold will move on Fed guidance
- The bull market in gold is in all currencies
Last Friday, the US dollar index rose to a new high on the September futures contract when it traded above the 97.715 May high. Typically, a stronger dollar weighs on the price of gold, but the yellow metal remained well above the $1400 level at the end of last week. While the rising dollar likely caused the upward trajectory of the gold market to pause, it has not sent the price of the precious metal appreciably lower.
A strong dollar and a bull market in gold may not be mutually exclusive in the current environment. On Friday, a 2.1% rise in second-quarter US GDP was another sign that the US economy is the strongest in the world. The dollar index rallied to its latest high in the aftermath of the economic report, but gold did not give up much ground and remains close to the highest price since 2014. This week, the FOMC is likely to cut the short-term Fed Funds rate by 25 basis points. Even though the dollar is strong, gold appears to be more sensitive to interest rates as it waits for clues from the Fed before it makes its next move. The SPDR Gold Shares ETF product (GLD) is the most liquid tool that tracks the price action in the precious metal.
The ECB pushes the Fed to lower rates
Last week, the European Central Bank told markets that more stimulus is on the way for the European economy. Short-term interest rates on the other side of the Atlantic Ocean could drop further from negative forty basis points. At the same time, ECB President Mario Draghi said that the central bank could resort to quantitative easing or asset purchases to push interest rates lower further out along the yield curve.
The Federal Market Open Committee of the US central bank will meet this week, and the market expects at least a 25 reduction in the short-term Fed Funds rate. While GDP in the US grew by 2.1% in the second quarter, the ECB is pushing the Fed to act. The US economy does not exist in a vacuum. At the June FOMC meeting, the Fed cited “crosscurrents” from China and Europe as justification for lower interest rates. The latest statement from the ECB validates the Fed’s concerns.
Gold will move on Fed guidance
Gold has been consolidating above the $1400 since the June Fed meeting. The yellow metal took off on the upside and broke through technical resistance at $1377.50 in June when the Fed told the markets that the path of least resistance for US interest rates is lower for the rest of 2019.
The monthly chart shows that the price of gold rose to its highest level since 2013 and has remained above its breakout level, which is now technical support. Last week’s guidance that the ECB is prepared to lower rates is bullish for the price of gold. This week, a 25-basis point rate cut by the US central bank would likely keep the price above technical support. A dovish statement by the Fed and validation that more reductions in the Fed Funds rate are on the horizon before the end of 2019 could light another bullish fuse and send the price of gold to a new high above the $1454.50 level.
The bull market in gold is in all currencies
Last week, the dollar index rallied in the aftermath of the ECB meeting. Lower European rates will keep interest rate differential at high levels, which is supportive of the US currency. At the same time, news that President Trump rejected a suggestion that the US should intervene in currency markets to devalue the dollar sent the September dollar index futures contract to a higher high. Typically, a stronger dollar is bearish for the price of gold. However, in the current environment, gold is in a bullish trend because all currencies are declining in value. While the price of gold broke higher in dollar terms, it also is at a multiyear peak in euros.
The chart shows that gold in euros is at the highest price since 2012.
In Japanese yen terms, gold recently rose to a new all-time high. Gold has been moving higher in almost all currencies since the early 2000s. The trend in the yellow metal is a sign that all foreign exchange instruments are losing value in an environment where stimulus by central banks has become the norm, rather than the exception.
Gold is waiting to make its next move until it hears from the US central bank. The trend is always your friend, and it is higher for the yellow metal that is the world’s oldest currency instrument.
The SPDR Gold Shares (GLD) was trading at $133.90 per share on Monday morning, up $0.26 (+0.19%). Year-to-date, GLD has gained 8.29%, versus a 13.43% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of ETFDailyNews.com.
About the Author: Andrew Hecht
Andrew Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is a top ranked author on Seeking Alpha in various categories. Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup. Over the past decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities. Aside from contributing to a variety of sites, Andy is the Editor-in-Chief at Option Hotline.