The Fed Officially Joins Loose Global Monetary Policy Posture
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Earlier this week, the market was surprised by an overtly dovish FOMC monetary policy statement by Federal Reserve Chairman, Jerome Powell. Although the U.S. central bank left interest rates unchanged with its current range between 2.25% and 2.50%, the Fed dramatically downgraded its expected rate path to signal that no rate hikes are likely to take place in 2019.
The Fed mentioned the reasons behind the decision being slower economic growth and a number of geopolitical uncertainties, including Brexit and the ongoing U.S.-China trade talks. Just after the release, the market priced in a 40% chance of a cut this year and a 50% chance of a cut by January 2020. This news is bullish for the gold complex and other U. S. dollar sensitive assets such as industrial commodities.
Before the announcement, both Gold and its miners had been consolidating recent gains with decreasing volume since peaking on February 20th. However, computer-based algorithm buy-orders in both the GLD and the GDX were triggered once the speech was released to the market immediately at 2:00pm EST on Wednesday. The rush of buying saw the gold backed ETF, along with the global miner ETF, make strong upside reversals from their respective 50-day moving averages by the close of trade.
Another bullish factor for the precious metals complex is the positive divergence between gold and gold stocks, as the GDX/GLD ratio continues to trend higher from the low made in GDX last September. Also, keep an eye on the Gold/Silver ratio, which may have begun to roll over after the Fed speech this week. I feel this important ratio needs to be below 80-1 before we see a full-fledged precious metal bull market.
Although both gold and its miners were bid up sharply after the FOMC monetary policy announcement, the U.S. equity market ended with the broad averages largely unchanged. Most observers had expected the central bank to be much less dovish, so Powell’s latest utterance should have produced a reaction of at least mild relief. Many gold sector analysts believe the last remaining factor for gold to morph into a full- fledged bull market will be the gold complex making a higher high relative to the stock market, which has yet to take place.
The U.S dollar was hit hard on the news and sliced through its 200-day moving average after back-testing its 50-day moving average before the speech was released. The world’s reserve currency closed lower on its ninth consecutive session, less than two weeks removed from closing at a nearly two-year high.
The greenback’s decent can also be attributed to growing de-dollarization according to the latest research from Bank of America Merrill Lynch (BoAML), who said Monday that although the U.S. dollar remains the dominant reserve currency, its status in the world is beginning to slow. The influence of the dollar is waning, providing some support for gold.
“Even though USD still accounts for 39.9% of international payments according to SWIFT, its market share has declined, as the global economy has become less U.S. and USD-centric,” the analysts said. “We believe that de-dollarization is an important factor behind the addition of gold to central bank gold reserves.”
After a strong over-sold bounce took place in the USD Cash Settle Index yesterday, many analysts believe further dollar weakness is an essential factor for allowing gold to break out of its multi-week trading range. But safe-haven gold demand has been the one constant holding up the metal’s price since last October, even as the dollar’s value has fluctuated.
At the beginning of Q4 last year, the greenback was priced around relatively the same region it is trading in today, while gold is priced over $100 higher. This is the result of both the U.S. dollar and gold being accumulated as a safe-haven by investors globally, depending on which currency one uses in commerce. Gold is now bullish in most major currencies but needs a monthly close above $1362 in the world’s reserve currency before the safe haven metal can technically be considered being in a bull market.
Gold has also greatly benefitted from the complete failure of the ECB, which has destroyed the European bond market, turning the people of Europe into collateral damage. Increased taxation, which has lowered disposable income in the Eurozone, is responsible for the riots we have witnessed outside the USA with the rise of the Yellow Vest movement.
Last Saturday, in the 18th straight weekend of French demonstrations against President Emmanuel Macron, Paris saw a second major uprising of Yellow Vest protests. Many are now arguing that the rioting on the Champs-Elysees has been instigated by extremists that have infiltrated the movement to further a second French Revolution. It appears as though the people are fed up with the diminishing standard of living in the name of endless socialism that justifies ever increasing taxation.
Meanwhile, Britain could leave the European Union without a Brexit deal on April 12 if lawmakers fail next week to back Prime Minister Theresa May’s agreement with Brussels, EU leaders said after a crisis summit in Brussels yesterday. May said that if the deal falls by April 12, “we would either leave with no deal, or put forward an alternative plan” that involved participating in EU Parliament elections.
The EU is fighting for its survival and if the British exit from the European Union remains chaotic, they could use this against Italy or anyone else who dares to consider leaving. The elections for the European Parliament are coming up in May, so we could be looking at the makings of a political crisis building in Europe, which would keep gold’s safe-haven component well bid.
With the Fed now joining central banks around the world creating what amounts to a synchronized loose monetary policy, combined with the aforementioned geo-political issues possibly coming to a head in May, we should expect gold to remain well bid above $1280 per ounce. I will now be focusing on these developments possibly beginning to form the handle of a cup & handle pattern on the weekly gold chart.
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