Fed’s Dovish Pivot Drives Gold’s Rally

Fed’s Dovish Pivot Drives Gold’s Rally

$XAU, $GLD, $SLV, $USD

Gold’s rally its highest marks since Y 2013 looks to have room to run after the Fed indicated a readiness to cut borrowing costs, which would keep real rates low and weigh on USD.

“Gold could end the year higher,” said a portfolio manager at the $27-B BlackRock Global Allocation Fund (NYSE:BLK), said in an interview. “If we continue to see a pivot toward easier monetary policy from the Fed, then I think gold can go higher from here,” he said, adding that there is likely to be some pullback and consolidation in the near-term.

Gold is back in focus as investors seek havens amid slowing global growth due to the fallout from the US-China trade dispute and as central banks globally adopt a more Dovish tone.

While the Fed left its Key rate unchanged last Wednesday, it dropped a reference to being “patient” on borrowing costs and forecast a larger miss of their 2% inflation target this year. The USD weakened to erase its Y 2019 gains.

“If easier policy from the Fed contains the dollar, that’s an environment, all else equal, that is supportive of gold,” BLK’s portfolio manager said last week in a phone discussion after the central Fed’s decision. “What I would add is if we get a situation where the Fed is easing perhaps more than people thought because trade frictions are rising, that might be a particularly strong period for gold.”

The Fed would be easing at the same time as volatility would be rising and demand from investors for hedges would be going up, he said.

On that day, Gold futures for August delivery climbed 1.3% to $1,418.20 at 1:32p on the COMEX in New York. Prices soared 4.1% last week, the biggest gain since April 2016. A gauge of the USD hit a 3-month low.

Prices surged to $1,411.63 last Friday, the highest mark in nearly 6 years.

Wednesday’s results:

  • Aug gold settled Wednesday’s session -2.40 lower (-0.2%) at $1416.05 oz,
  • July silver settled the session +0.01 higher at $15.30/oz

Citigroup Inc. said last Thursday that the enthusiasm is justified, with $1,500 to $1,600 possible in the next 12 months under a Bullish-case scenario that includes borrowing costs falling below Zero.

The Fed last cut rates in Y 2008 and began its most recent tightening cycle at the end of Y 2015, with four hikes last year. The so-called dot plot, which the US central bank uses to signal its outlook for the path of interest rates, shows that policy makers are divided for the remainder of Y 2019.

Last week ECB President Mario Draghi paved the way for a rate cut, and counterparts in Australia, India and Russia have lowered borrowing costs.

“In the near term, gold, like bonds, has had a very large move, so it would not be surprising if there was some consolidation,” said the portfolio manage, adding that BlackRock’s bullion holdings through ETF’s have been “relatively static” over the last month. “But if we are moving into a period where the Fed or other central banks feel the need to ease monetary conditions, gold is probably going to have a better environment than it did earlier this year.”

HeffX-LTN’s overall outlook for GLD is Bullish with all of our Key technical indicators still flashing Very Bullish in here.

Stay tuned…

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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