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Gold rises as global central banks raise interest rates

Commentaries & Views

As the Russia-Ukraine war continues with no end in sight, investors shifted their attention mid-week to the Federal Reserve's expected move to end three years of a highly accommodative monetary policy. In anticipation of this historic event, the gold price came down to test critical support at $1900 this week while in the process of consolidating a $300 move higher from $1780 in late-January. Gold Futures ran towards record peak resistance at $2089 in early March, coming just $20 short of this major milestone and became extreme overbought while doing so.

Historically, geopolitical turmoil has been a short-term driver when moving the gold price to extremes in a short period of time. Geopolitical catalysts rarely last in the longer term for gold, however, the war in Ukraine is having a greater impact on the global economy and financial system, adding fuel to an already uncertain political and economic environment.

Faced with the first serious threat of high inflation since the early 1980's, the Federal Open Market Committee (FOMC) approved of the first-rate hike since December 2018, as expected, on Wednesday. But Federal Reserve policymakers signaled much faster interest rate hikes this year than they had projected just a few months ago.

The world's most powerful central bank also acknowledged that inflation will continue throughout the year and raised its personal consumption expenditures (PCE) to 4.1%, compared to the initial forecast of 2.7% four months ago and just 1.9% a year earlier. These are huge alterations for a conservative central bank that rarely makes big changes in its forecasts.

Meanwhile, the forecast for overall GDP was lowered to 2.8% compared to the initial expectation of 4%, setting the stage for stagflation as the U.S. Treasury yield curve flattened even further after the Fed raised the interest rate on Wednesday. An "inversion" of the yield curve has preceded every U.S. recession for the past half century.

Moreover, the central banks of Great Britain, Brazil, Hong Kong, UAE, Saudi Arabia, Kuwait, Bahrain, Taiwan, Uzbekistan and Macau also hiked interest rates post the Fed's decision. The Bank of England raised interest rates on Thursday for a third meeting running, as expected, but softened its language on the need for further increases from here.

After maintaining the benchmark interest rate around zero, the Federal Reserve will raise rates by 25-basis points, bringing the range to 0.25%-0.5% as the world's most powerful central bank begins an attempt to tamp down soaring inflation.

Furthermore, the committee plans to raise rates at each of their six remaining meetings in 2022 and bring the Fed Funds Rate to between 1 .75% and 2% by December of this year, followed by stable rates throughout 2023. The decision was mostly unanimous aside from St. Louis Fed President James Bullard who requested a 50-basis point rise.

Shortly after this announcement, the gold price traded briefly to $1895 but quickly reversed as Fed Chair Jerome Powell addressed the media during a subsequent press conference. Towards the end of the virtual meeting with the press, as Powell dodged a question regarding the Fed being “behind the curve,” the gold price moved towards $1920.

The Fed not moving earlier has quite obviously put the central bank well "behind the curve" due to the fact that Powell spent all of 2021 trying to convince the markets that inflation was "transitory", instead of taking measures to ensure that inflation did not stray too far from its 2% target.

Historically, the start of Federal Reserve rate-hike cycles has marked significant bottoms in the gold price in 1999, 2004, 2015, and 2018. Now that the Fed has officially begun moving forward with tightening its monetary policy, the gold complex is likely consolidating earlier out-sized gains in an attempt to create a new floor at $2000, which has been strong resistance for the past decade.

A similar consolidation took place leading into the Global Financial Crisis in 2008, after the gold price nearly reached the important $1000 level for the first time in March of that fateful year. Once an extreme overbought gold price nearly hit this headline-grabbing number, a sharp correction ensued below $700 as most everything was being sold to meet margin calls, while the U.S. dollar became the safest-haven. But once the $1000 level became a solid floor 15-months later, the gold price nearly doubled in just 2-years.

After the current consolidation of recent outsized gains has run its course, the significant 12-year cup and handle pattern will be completed once the $2100 level has been breached on a monthly closing basis. There are not too many examples of a multi-year cup and handle pattern in the major markets, and investors should understand how bullish this pattern can be when it occurs over a long period of time. The current cup and handle pattern in gold projects to a technically measured upside target of around $3,000.

Meanwhile, both the GDX and GDXJ have technically completed an accumulative 6-month bottoming process. Although more consolidation of recent gains is expected to take place in the near-term, the risk has now firmly shifted to the upside in precious metal's stocks.

The mining complex has been showing relative strength to the gold price, along with the stock market, since late January. While precious metal's stocks have become short-term overbought, weakness continues to be bought with recent outsized gains being consolidated above previous resistance levels that are attempting to become support for higher prices.

Similar to the current situation in the gold complex, during the lead-in to a telegraphed rate-hike cycle by the Fed in late 2015, mining stocks began to bottom six months prior to the announced hike in mid-December. And once the tightening of the central bank's monetary policy began, the mining sector nearly tripled in just six months from a similarly depressed level and accumulation time-frame which has recently been technically completed.

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