Gold In The Wake Of The June Fed Meeting - Boom

June 22, 2019

London (June 22)  Gold is a currency and a commodity that is unlike all other assets as it is a hybrid. As a raw material, jewelry, and a myriad of industrial applications require gold. As a currency or financial asset, central banks around the world hold the yellow metal as an integral part of their foreign exchange reserves. Over the past years, governments have been net buyers of the precious metal with China and Russia leading the way. Both nations are significant gold producers and have vacuumed in their domestic output to build reserves. Moreover, China and Russia have also purchased the metal in the international bullion market.

The decline in faith in fiat currencies has been supportive of the gold market since the turn of the century. The price of gold has been moving higher when it comes to all of the leading reserve currencies of the world, including the US dollar, the euro, and the yen. The US dollar is the reserve currency of the world, and it tends to have an inverse relationship with the gold market. US interest rates impact the price of gold as they often determine the path of least resistance for the US currency. However, US rates also influence the cost of carrying gold inventories and long positions. Lower US rates often weigh on the value of the dollar against other world currencies and support the price of gold as they can stimulate inflationary pressures. Gold is a barometer of inflation.

We heard from the US Fed on June 19, and the signs are that the central bank has pivoted from a hawkish to a dovish approach to monetary policy which could be good news for the gold market. Gold went into the latest Fed meeting at a level that was not far from critical technical resistance areas at the 2018 and 2016 highs. A technical breakout followed the June Fed meeting even though the central bank did not lower the Fed Funds rate at the meeting. The Direxion Daily Gold Miners Index Bull 3X Shares (NUGT) and the Direxion Daily Junior Gold Miners Index Bull 3X Shares (JNUG) products can turbocharge results if gold is ready to take off to the upside to new multiyear highs.

The Fed speaks on June 19, and gold reacts

The US Federal Reserve did not lower the Fed Funds rate at their June meeting last Thursday, but the central bank did tell the markets that a majority of the members of the FOMC favor lowering the short-term rate by 50 basis points before the end of 2019. The Fed pivot was a significant event for markets as interest rates along the yield curve fell immediately following the meeting as they cited the low level of inflation as the reason for lower rates. The previous day, highly accommodative statements from the European Central Bank President Mario Draghi turned out to be another supportive factor for the price of gold.

On Thursday, Iran shot down a US drone near the Strait of Hormuz, and President Trump said that the theocracy in Teheran made a "big mistake." Gold loves lower interest rates. At the same time, the rising tensions in the Middle East combined with lower US rates which weighed on the value of the US dollar caused gold to blow through resistance levels and rise to its highest price in five years.


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