That escalated quickly!
Following gold’s rapid pullback to US$1,200 per ounce, I told you it would jump just as quickly last week:
‘Fortunately, with the bears having won that war, gold bulls seem ready to take revenge. Following gold pulling back into the US Federal Reserve meeting tomorrow, in my opinion, it should bounce into March-end. That could see gold bounce towards the US$1,230 per ounce level.’
Gold’s move surprised almost everyone, and it might not be over…yet.
The yellow metal rebounded more than US$35 per ounce from its low prior to the Fed’s decision to raise interest rates by 0.25%, and is trading at US$1,234 per ounce today. The US dollar nosedived against all other currencies.
Unexpectedly, US Fed chair Janet Yellen painted a cautious outlook for the US economy last week. Yellen is the biggest ‘dove’ at the Fed, according to our in-house strategist Jim Rickards. That’s a comment difficult to argue against. Yellen proved her extreme cautiousness last week.
What does that mean for gold?
I’ll explain below…
Does Janet Yellen know what she’s doing?
The latest economic data shows US inflation jumped during January. That’s big news. The Fed has been worrying about inflation for years. Weak inflation data has been a big reason why interest rates are so low. Yet, despite the cautiousness, inflation has nearly doubled over the past 12 months.
Plus, jobs data remains reasonably strong, and US stocks are trading near all-time highs!
With plenty of evidence to raise interest rates, the Fed noted that inflation was little changed, remaining below its long-term target of 2%. Apparently, energy and food prices are to blame.
‘That [inflation] rise was largely driven by energy prices,’ Yellen said during her press conference last week. Still, she said the Fed expects inflation to creep higher in the near future. Yellen wants to see inflation move higher, with less impact from crude oil.
Will it happen?
On another note, US President Donald Trump is seeking to slash regulations, cut taxes and boost government spending. Yellen’s not convinced his plan will do much for the US economy. She said there’s ‘…little evidence of sea change in the economy, aside from greater confidence among businesses and consumers.’
I’d say that’s a good start…
As your confidence rises, you’re more likely to spend your disposable income, and businesses are more likely to hire.
In other words, it’s hard to understand Yellen’s cautiousness.
Of course, Congress might never approve Trump’s policies. There are plenty of Republicans and Democrats who don’t want to work with him. More on that another day…
In summary, the Fed signalled two more rate rises this year. And while that’s the same forecast made back in December, economists were predicting three more rises this year…one during each quarter. For that reason, contrary to previous expectations, investors are pricing in almost no chance of another rate rise during May. The chances of a rate rise in June remain 50/50.
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Gold charging…but for how long?
The bearish tone was enough to send gold bulls charging. Gold rocketed to a two-week high. As Reuters reported last night:
‘“The market was geared for a hawkish FOMC and the Fed was really dovish. There was a lot of short-covering. People are now putting gold back on the plate and are more comfortable,” a Hong Kong-based precious metals trader said.
‘“The dollar is weaker across the board…its pushing gold higher…a pure technical buying.”
‘Markets are also looking ahead for a packed week of Fed messaging, with no less than nine different policy makers set to speak, including Chair Janet Yellen on Thursday.’
Lots of Fed policymakers are due to speak this week, including four voting members. I’ll be most interested in what Janet Yellen has to say at the Federal Reserve System Community Development Research Conference in Washington DC. With potential blue skies ahead for interest rates, the Fed might be less hawkish than previously thought.
Remember, as pointed out above, the US stock market is nearing all-time highs. It hasn’t seen a correction in over 12 months. With a rising stock market, the Fed doesn’t want to be blamed for causing a bubble. Plenty of commentators argue Yellen has already caused a bubble.
Of course, the only bubble is the bond market. 35 years of lower interest rates — artificially maintained near 0% for over a decade by the US Fed — has resulted in the largest bubble in history. So, once the noise surrounding monetary policy dissipates, the focus will return to fiscal policies and the stock market.
Stock markets have been driven by Trump policy ‘rumours’ and ‘tweets’ over the last couple of months. That might continue to be the case in the short run. If that plays out, Yellen might be more likely to raise rates sooner rather than later.
Technical analysis — gold’s next move
Nevertheless, even with higher stock prices, it should be some time until the Fed raises rates again. The next meeting isn’t until May. For that reason, if we hear any dovish comments on interest rates this week, gold could keep pushing higher into next week.
Take a look at the daily chart below:
Source: tradingview.com; Resource Speculator
[Click to enlarge]
The blue line shows the major resistance at US$1,237.56 per ounce. Gold must close above that on a daily (and ideally weekly) basis to move towards the pink resistance level at roughly US$1,245 per ounce. In my view, that’s the absolute highest price target for this rally.
Gold is also approaching major resistance, as shown by the green breakout line at US$1,236 per ounce. That highlights the last major low at US$1,194 earlier in the month. Gold must close below the black support line, standing at US$1,218 per ounce, to re-test that low.
In summary, gold remains at a major resistance level. But the bounce lives on…
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Editor, Markets & Money