The Fed Is Meeting This Week. Here’s What It Means for Gold

July 29, 2019

Washington (July 29)  The Federal Reserve meets this week, and Chairman Jerome Powell has already signaled the central bank’s plans to lower its federal funds target. It might be time to buy gold.

Gold for July delivery on the Comex division of the New York Mercantile Exchange gained $4.60 an ounce Friday to close at $1,418.50, leaving it with a year-to-date gain of 11%. But that doesn’t mean it can’t continue higher. With the Fed set to cut rates, gold could look more attractive for investors worried about wealth preservation.

“Central banks doing more of this printing and buying of assets will produce more negative real and nominal returns that will lead investors to increasingly prefer alternative forms of money (e.g., gold) or other storeholds of wealth,” wrote Macro Risk Advisors’ Gregg Wysocki. “Gold and silver seem like “the most obvious beneficiaries” of a lower real rate trend.

Such an idea has gained some big proponents recently. Ray Dalio—founder of the world’s biggest hedge fund, Bridgewater Associates—touted the precious metal in a post July 17. Gold performs well “when the value of money is being depreciated and domestic and international conflicts are significant,” he wrote. “I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”

In fact, the only thing standing in the way of higher gold prices might be whether the Fed’s rate cut is the first of many or simply an insurance cut to ensure continued economic growth. Gold has upside as growth and yields fall, wrote Deutsche Bank’s Binky Chadha, who noted that the precious metal has also broken out of a seven-year range and had room to go further. Gold has historically underperformed, however, during a “mini easing cycle” relative to a cycle driven by a recession, Chadha said.

Buying coins or bars is one way to bet on gold, but exchange-traded funds like SPDR Gold Shares  (ticker: GLD) also provide direct exposure. ETFs such as the VanEck Vectors Gold Miners ETF (GDX) and the VanEck Vectors Junior Gold Miners ETF (GDXJ) allow investment in companies that dig up the metal.

Ned Davis Research’s Will Geisdorf wrote in a note on Wednesday that he thinks a bullish view on gold is best expressed through buying smaller miners.

Geisdorf noted that there have been 20 rallies in gold of 10% in the past 20 years. Gold miners outperformed gold in 14 of the 20 cases, while so-called junior gold miners outperformed miners as a group in 11 of the 17 gold rallies in the past 15 years.

“Gold is ripe for a short-term pullback given excessive optimism,” he wrote. “However, long-term sentiment for gold miners is showing extreme pessimism. Both GDX and GDXJ are in the top quintile of our short-term and long-term relative strength rankings.”


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