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Gold gains traction as Fed hints at a pause after raising rates ¼%

Commentaries & Views

The Federal Reserve concluded this month's FOMC meeting and as expected the Fed raised its terminal rate by ¼%. This takes the Fed benchmark rate to between 5% and 5 ¼%. Most importantly, after 10 consecutive rate hikes the Fed signaled that they may finally enact a pause of further rate increases at the next FOMC meeting in June.

This would allow the Federal Reserve to assess the damage from recent bank failures, and gauge inflationary levels which will lag behind rate hikes by the Federal Reserve. A pause would also allow the Fed to wait for a resolution over the US debt ceiling dilemma.

The rate hikes enacted by the Federal Reserve have definitively taken inflation down, it has also caused tremendous fallout. Continued rate hikes not only would have a detrimental effect on the economy but it would also have less of an effect on reducing inflation. Inflation has hit an area in which many sectors remain persistent or sticky and as such continued rate hikes would not have the intended effect of reducing inflation but would have the unintended effect of causing more harm to the financial system.

Gold futures broke out of their defined trading range between $1980 and $2020 yesterday. On a technical basis, prices were stuck inside of an asymmetrical triangle with a descending upper resistance line and a flat bottom. Yesterday's strong upside move took current gold futures pricing well above the upper-level resistance line. This resistance line proved to be definitive support as gold traded to a low of $2016 today which is precisely above the former resistance line which I now believe will act as a technical level of support.

The chart above is a 240-minute Japanese candlestick chart of June gold futures. It clearly illustrates both the flat bottom that is defined by multiple occasions in which gold traded to $1980 but close well above it. It also illustrates that gold has traded with a series of lower highs up until yesterday's breakout which took gold above its former resistance level.

As of 4:50 PM EDT gold futures basis, the most active June contract is up $25.10 and fixed at $2048.50.

Concerns about the banking crisis and the debt-ceiling remain unanswered

Now that the Federal Reserve has concluded this month's FOMC meeting, market participants will focus intensely on two major events that could lead to tremendous economic upheaval. There continues to be angst about the political standoff between the Democratic and Republican legislators regarding raising the debt ceiling. The fact that the government will not be able to meet its obligations much sooner than anticipated earlier is troublesome. More importantly, the divide between the Democrats and Republicans has never been wider which will make it very difficult for a compromise to be reached. As I've said over the last two days, during other instances where the debt ceiling had to be raised legislators played “kick the can down the road" however in this instance with so little time left to resolve the issue it seems are “playing a game of chicken".

Lastly, the banking crisis continues to be extremely worrisome as the possibility of more banks becoming insolvent remains. Collectively, the debt crisis remaining unresolved and the potential for more banks to become insolvent will have an exceedingly detrimental effect on the economy. These factors will continue to be highly supportive of gold moving higher.

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Wishing you as always good trading,

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