Gold Is Waiting And Watching

July 14, 2019

London (July 14)  The price of gold had traded in a $331.30 per ounce range from April 2014 through June 2019. The bottom of the trading back came in December 2015 at $1046.20 per ounce. During that month, the US Federal Reserve hiked the short-term Fed Funds rate for the first time in years from zero percent. The high occurred less than one year later in the aftermath of the shock of the Brexit referendum in the UK that took the price of gold to a high at $1377.50 per ounce. Other than the extremes that came within an eight-month period, the price action in gold remained trapped in the trading band.

Over the almost three and one-half years where gold traded back and forth, the US Federal Reserve hiked short-term interest rates nine times by 25 basis points pushing the Fed Funds rate to a high at 2.25-2.50%. At the same time, the central bank rolled out a program to reduce its swollen balance sheet. Quantitative tightening pushed rates higher further out along the yield curve. In 2019, the Fed did an about-face. Earlier in the year the FOMC canceled rate hikes for 2019 and cut the number of project hikes in half for 2020, as they told the market to only expect one 25 basis point increase in the Fed Funds rate next year. At the same time, the central bank announced that the program of balance sheet normalization would end in September 2019. With the rate of inflation falling short of its target 2% level, and trade issues weighing on the global and US economies, the Fed went one step further at its June meeting telling the markets that the Fed Funds rate would decline before the end of the year.

Gold fell to the low end of its trade range on the back of interest rate hikes in late 2015, and when the central bank told the world that rates were heading lower in June 2019, the price broke out to the upside and above the 2016 peak.

If the move to the upside is the next leg of the bull market in gold that began back in the early part of this century, gold mining stocks are likely to outperform the yellow metal on a percentage basis. The Direxion Daily Junior Gold Miners Index Bull 3X Shares (JNUG) is a short-term product that is likely to turbocharge the price action in the gold market if more news highs are on the horizon over the coming weeks.

Gold broke out, but it had stalled

On June 20, gold broke out to the upside and surpassed the level of critical technical resistance at $1377.50 per ounce on the active month August futures contract and the nearby continuous contract on the COMEX futures market.

The long-term monthly chart highlights that the yellow metal broke into new territory on the upside and reached a high at $1441 per ounce. Open interest, the total number of open long and short positions in the COMEX gold futures market, increased with the price of the precious metal which provided a technical validation of the breakout to the upside. Both price momentum and relative strength indicators continue to display a bullish trend, but both have risen into overbought territory in the aftermath of the move to the highest price since 2013.

The price of gold reached its high on the August contract on June 25 and the continuous contract on July 3, but since then, the price fell to below $1400 and had been trading on either side of the level. Gold has been consolidating at a higher price, but the trajectory of the move that occurred following the June Fed meeting stalled.

The yellow metal has not challenged the first downside support level, yet

While gold has moved into consolidation mode, it has not tested the previous level of technical resistance at $1377.50, which is now support.

The daily chart of August futures illustrates that gold fell to a low at $1384.70 on July 1, which was the most recent low. Gold could only manage to correct to a price that was $7.20 above the breakout level, which is a bullish sign for the yellow metal. On Friday, July 5 the price fell to a higher low at $1388.60 after economic data cast a shadow over the potential for a Fed rate cut at the July FOMC meeting.

Economic data caused the upside trajectory to stall

The July 5 employment report came in at 224,000 new jobs, which was considerably higher than analysts had expected. At its June meeting, the Fed expressed concerns over recent economic data as a reason for the plans to trim the Fed Funds rate by the end of 2019. While the central bank did not cut rates at its June meeting, the market interpreted its statement as a sign that at least a 25-basis point cut was coming at the July meeting. The robust employment report shed some doubt that the data-driven Fed would pull the trigger in July, which sent the dollar higher and gold lower. However, the yellow metal failed to fall to a new low and to challenge the $1377.50 support level.

In his testimony before Congress on Wednesday, July 10, Chairman Jerome Powell dispelled any doubt that a rate cut is on the agenda for later this month, and the price of August gold futures climbed to settle at $1412.50 on the session. It is possible that the period of consolidation has come to an end, and gold is now ready to reach higher heights over the coming days and weeks.

Central banks continue to buy gold

The latest data from the World Gold Council and International Monetary Fund shows that central banks continued to aggressively add to gold reserves in April and May of this year. The IMF revised April's net purchases from 43 to 49 tons and told markets that central banks purchased a net of 35.8 tons in May. So far in 2019, the official sector bought a net of 247.3 metric tons, which is a 73% increase from the same period in 2018.

Russia and China continue to lead the pack when it comes to gold buying in 2019, continuing the trend of recent years. Qatar was the only central bank that sold the yellow metal in May as it reduces its holdings by 6.2 tons over the month.

While central banks rarely speak publicly about gold holdings, action speaks a lot louder than words. China and Russia, two of the world's leading gold-producing nations, have been vacuuming in all of their domestic production for years to build reserves. Both countries have also been purchasing gold in the international market to diversify foreign currency reverses away from the US dollar.

The trend of buying in the official sector continues to underpin demand for the precious metal now that it has broken out to the highest price in a half-decade.


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