Gold Getting a Boost as Fed Expresses Concern

Intermediate
  • As the Fed indicate rate cuts are coming gold will keep rising over the summer 
  • There is a disconnect between asset price inflation and the real economy 
  • Earnings will be flat or disappointing and too much debt has little or negative yield 

I last looked at Gold on May 26, 2019 when I called for buying the metal to target $1304/Troy Oz. The stop was set at $1250. Since that time the first target was reached on May 31. The stop was not activated as the low since May 26 as $1273.90. 

I believe gold is setting up for a solid upside breakout after reaching the first target and barely looking back. 

The market for gold closed on Friday at $1417.65/Troy Oz a gain of $10.95 on the day or 0.78%. The chart shows that gold has shown a clear signature of rotation in a gently rising impulsive channel over the past month. One can see the mid-channel line that has contained the gold price since July 10 and yet across the entire technical outlook horizon gold is booked as a “STRONG BUY”. 

Gold Futures

Source: www.investing.com , Spotlight Ideas 

I have overlaid on the price range a Fibonacci extension and contend that buying gold in the low $1400’s is an excellent opportunity as I am now looking for gains to break above $1500 with the prospect of more to come after that. Market Comment Gold Getting A Boost As Fed Expresses Concern July 14th, 2019 

Why should this be the case? In the past week the Chair of the Federal Reserve, Jay Powell appeared to shift the debate from will the Fed cut rates to one of when and by how much will Fed Funds be reduced from the current level of 2.50%. 

The Fed held the target range for the Fed Funds rate at 2.25-2.50% but dropped a promise to be “patient” in adjusting rates and signalled possible rate cuts of as much as 50 bps later this year. 

The policymakers left economic projections for growth and unemployment mostly unchanged, but they will have noted headline inflation was forecast at just 1.5% for the year, down from the 1.8% projected in March. 

This week saw Fed Funds Futures imply 75bps of easing in Fed Funds by early 2020. While 75 basis points may seem aggressive, if the Fed initiates a rate-cutting policy we should prepare for more. 

I accept that when the unemployment rate is at 50-year lows calling for three 25 bps rate cuts is a tough chew, however, please remember that the Dow over 27,000 and the S&P 500 over 3000 represents asset price inflation…not real economy inflation. GDP growth has begun to slow only after a period of above-average growth. 

So, the Fed is looking ahead and is publicly expressing concerns based on slowing global growth, trade wars, and diminishing returns to a fiscal stimulus that lifted the economy since 2017. 

The central banks are worried, rates are coming down, this will benefit the attraction of gold as equity earnings disappoint and good quality has little or negative yield. 

Summary: 

Buy now target 1510 

Stop at 1380 

Stephen Pope

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

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