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Gold Investors: Focus On Yield Curve Not USD - Analysts

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(Kitco News) - For the third week in a row, the gold market has managed to scratch together another gain as the precious metal continues to fight against a resilient U.S. dollar.

However, many analysts are warning investors to ignore the short-term volatility due to the U.S. dollar and focus on the bullish long-term trend after the Federal Reserve turned unambiguously dovish, lower its growth and interest rate expectations for 2019.

Optimism remains strong in the gold market even as gold was only able to hold on to some of gains for the week. April gold futures last traded at $1,312.40 an ounce, up 0.73% from last week. Hurting the yellow metal has been continued strength in the U.S. Dollar Index, which is ending the week nearly unchanged after suffering an almost 1% loss after the U.S. central bank said that it sees no rate hikes this year, down from the expectation of two rate hikes in December.

At the same time, the central bank also downgraded its growth forecast seeing GDP growth at 2.1% in 2019, down from December’s estimate of 2.3%.

Many commodity analysts are discounting the recent strength in the U.S. dollar as it is more of a function of other currency weakness than outright U.S. dollar strength. The euro dropped Friday significantly following disappointing sentiment in the Germany manufacturing sector.

The British pound continues to suffer from the nation’s ongoing drama surrounding the plan to exit the European Union.

“Right now we are in a world where it’s not obvious what you can substitute the U.S. dollar for,” said David Madden, market analyst at CMC Markets. “To mix metaphors, the U.S. dollar is the dog with the least fleas.”

Neil Mellor,  senior currency strategist from the Bank of New York Mellon, said that the U.S. dollar remains resilient and gold is stuck in a holding pattern as markets wait and see if the Fed’s plan to stimulate the U.S. economy and inflation work out.

“Until we see a rise in inflation, gold will struggle to push higher,” he said.

Focus On U.S. Interest Rates Not U.S. Dollar

Bill Baruch, president of Blue Line Futures, said that although gold is suffering because of continued strength in the U.S. dollar, he sees long-term potential for gold as bond yields push lower.

“Gold is going to work higher and its time to shine will come, you just have to be patient,” he said. “Lower yields are the long-term fuel for gold.”

Baruch added that the move from the Federal Reserve, removing the expectation of two rate hikes off the table, felt like a desperate move from the U.S. Central Bank.

“Why did they make such a dovish move? You have to think that they see some real sh*t out there,” he said. “The Fed is scared and that is the problem and that is why you want to be long gold and long treasuries.”

Recession Fears Rising

Adam Button, managing director of ForexLive.com, said that he is also ignoring gold’s short-term price movement and instead of looking at the long-term picture.

He added that he is looking at the message the bond market is sending. Friday was a historic day for the U.S. bond market as it was the first time 3-month bill yields pushed higher than 10-year Treasuries yields. This is the first time the yield curve has inverted since 2007; an inverted yield curve has been a consistent recession indicator.

“The bond market is sending a terrifying signal for economic growth,” he said. “If the yield curve is correct then we are headed for a recession a year from now so where is gold going.”

Ronald-Peter Stoeferle, fund manager at Incrementum AG and author of the annual In Gold We Trust report, said that he expects recession fears to continue to grow, which would be positive for gold.

“The drastic moves by the Fed indicates that they see something bad hiding in financial markets and investors can’t ignore that,” he said.

However, Stoeferle added that gold prices need to push back critical long-term resistance at $1,360 before investors flood back into the gold market.

How To Play Gold

Baruch said that because of the strength in the U.S. dollar investors should take a more long-term approach to their gold outlook.

He added that one play he likes is buying a June $1,350 call option or even buy a June $1,330/$1,350 spread option.

In the spread option, investors would buy a $1,330 June call option and at the same time sell a $1,350 June call option.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.