Where are gold prices headed?

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August 5, 2019 12:09pm NYSE:GDX NYSE:GDXJ

NYSE:GDX | News, Ratings, and Charts

From Andrew Hecht

  • The Fed move sent gold lower last week
  • Disappointment masked a significant event
  • The action in gold around the world is a compelling reason to buy on dips – A bullish reversal on the weekly chart

The price of gold was volatile over the past week. The yellow metal broke out to the upside following the June meeting of the US Federal Reserve. The news that the central bank would cut short-term interest rates lit a bullish fuse under the gold market. The yellow metal broke out of the $331.30 trading range to the upside when the price climbed above the 2016 peak at $1377.50 in June. Gold rose to a high at $1454.40 in mid-July on the continuous COMEX futures contract. Gold had been consolidating above the $1400 per ounce level leading into the July FOMC meeting. Even though the Fed followed through on its guidance to cut the Fed Funds rate, the kneejerk reaction in the gold market was selling.

The most liquid gold ETF product is the SPDR Gold Shares (GLD) that holds all of its assets in gold bars. Gold fell to just over the $1400 level in the aftermath of the Fed meeting. However, the price settled much higher at the end of the week. The weekly technical price action in the gold market could be telling us that higher highs are on the horizon for the precious metal.

The Fed move sends gold lower

In a case of buy the rumor and sell the fact, the price of gold corrected lower in the aftermath of the Fed meeting on July 31. The price of the nearby futures contract fell to a low at $1400.90 per ounce on August 1 as the dollar index rallied to a new high at 98.700.

The decline in equities, gold, and rise in the dollar were counter-intuitive moves considering the decrease in short-term interest rates. At the same time, the Fed accelerated the end of balance sheet normalization, which stopped the process of pushing interest rates higher further out along the yield curve.

The price action in gold and other markets were signs that the Fed did not go far enough when it comes to the adjustment in monetary policy.

Disappointment masked a significant event

At the June FOMC meeting, the Fed told markets that rates would move lower by the end of 2019. Some market participants expected the Fed to make a statement with a 50-basis point reduction in short-term rates at the July meeting. However, the move at half that level turned out to be a disappointment. Gold plunged in the aftermath of the meeting. No one was more disappointed in the Fed’s decision than the President of the United States who took to Twitter to criticize the central bank.

On August 1, news that the US would slap a new 10% tariff on $300 billion of Chinese exports to the US lit a bullish fuse under the gold market. Aside from the uncertainty of an escalation in the trade dispute, the protectionist measures present a compelling case that the Fed did not go far enough the previous day.

Meanwhile, the knee jerk reaction of markets following the July FOMC meeting downplayed the significance of the event. The Fed had not cut interest rates in over a decade. One of the reasons for the reaction in markets across all asset classes was the press conference that followed the interest rate cut. Chairman Powell attempted to walk a fine line saying that while the move was not a one and done rate reduction, he would not preclude future rate hikes. At the same time, the Chairman stated that the US is not entering a prolonged rate cutting cycle. Additionally, the move was not unanimous as there were two dissenters; Eric Rosengren from the Boston Fed, and Esther George from the Kansas City Fed. Both argued that US growth remains robust, and a rate cut was not appropriate given the recent economic data.

The price action in the gold market could be telling us that the Fed will sing a different tune in the coming months as they under-delivered at the July meeting.

The action in gold around the world is a compelling reason to buy on dips – A bullish reversal on the weekly chart

In recent pieces, I demonstrated that gold has been appreciating in all currencies since the early 2000s. The break to the upside in dollars took the price of gold to all- time highs in more than a few currencies.

The push lower in the aftermath of the Fed meeting did not last long. News of an escalation in the trade dispute caused the price to move back towards the recent high buy the end of last week.

Source: CQG

The weekly chart illustrates that the price action in the gold market last week led to a bullish reversal. The price fell below the previous week’s low and closed above the prior week’s high. The highest weekly volume in 2019 and since early 2018 provides technical validation of the bullish price pattern.

Price corrections in the gold market have created buying opportunities, and that pattern looks likely to continue. The Fed pointed to the trade dispute as one of the leading reasons for pushing the Fed Funds rate lower.

The escalation late last week could mean that Chairman Powell will become even more dovish and more rate cuts are on the horizon.

The SPDR Gold Shares (GLD) was trading at $137.92 per share on Monday morning, up $2.03 (+1.49%). Year-to-date, GLD has gained 11.54%, versus a 7.75% rise in the benchmark S&P 500 index during the same period.

GLD currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #1 of 33 ETFs in the Precious Metals ETFs category.

This article is brought to you courtesy of ETFDailyNews.com.

About the Author: Andrew Hecht

andrew-hechtAndrew 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.

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