A Perfect Bullish Storm For Gold?

A Perfect Bullish Storm For Gold?

The Fed may have lit a bullish fuse under the gold market last week at the March FOMC meeting

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The trend in the gold market has been bullish since it hit a low at $1161.40 per ounce in mid-August 2018. The yellow metal has been making higher lows and higher highs with the most recent peak coming in mid-February at $1344 on the continuous contract and $1349.80 on the active month April contract. On Monday, March 25, the precious metal settled at $1322.60 as it seems poised to retest the 2019 high and perhaps challenge critical technical resistance levels above.  

Source: CQG

As the weekly chart highlights, both price momentum and relative strength indicators are in the upper region of neutral territory. Open interest, the total number of open long and short positions has been rising with the price of gold. Price appreciation alongside increasing open interest is typically a validation of a bullish trend in a futures market.

Technical resistance stands at the recent peak at $1344 on the continuous contract. Above that level, the double top high from January and April 2018 at $1365.40 stands as gold’s first hurdle on the upside. If gold can conquer last year’s high, the line in the sand is at the July 2016 peak at $1377.50 which is the critical longer-term level for the yellow metal. Last week, the US Federal Reserve may have provided gold with a green light to challenge the upside.

On March 20, at the latest FOMC meeting, the US central bank provided markets with a dovish surprise. The Fed said they would not increase the Fed Funds rate at all in 2019 leaving the rate at 2.25-2.50 percent after four rate hikes in 2018. Alongside canceling two project hikes for 2019, the Fed also trimmed expectations for 2020 saying that current conditions would only warrant one 25 basis point increase in the short-term rate next year. In one meeting, the FOMC canceled three previously projected rate hikes totaling 75 basis points. Moreover, the central bank told markets that the program of balance sheet normalization would end in September 2019 taking pressure off interest rates further out along the yield curve. The Fed transformed their approach to monetary policy from a hawk to a dove at their March meeting.

The price of gold traded to just below $1300 per ounce in the leadup to the latest Fed meeting, but it moved higher in the aftermath. Lower expectations for interest rates over the rest of this year is bullish for gold for two reasons. First, lower rates decrease the cost of carrying a long position in the yellow metal. Second, and more significantly, lower interest rates are likely to take the upward pressure off the US dollar. A stable to lower dollar against other world currencies is also bullish for the price of gold given the long-standing inverse relationship between the greenback and yellow metal.

The Fed’s hawkish posture in 2018 sent gold to lows last August. Now, a reversal in their approach to interest rate policy is likely to have the opposite impact. Gold looks like it is heading for a test of technical resistance levels that are not far above the current price. The Fed may have lit a fuse under the gold market and put in place an environment that could turn out to be an almost perfect bullish storm that carries the price a lot higher than most analysts expect over the coming weeks. 

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