The Trend

Technical Analysis: The Case for Gold

Whenever the Federal Reserve even hints at higher interest rates, traders sell gold.

They fear gold would lose its shine, as compared to yield-bearing assets when interest rates begin to rise.  In fact, it’s why gold had five straight days of losses prior to the June 2017 Federal Reserve meeting on rates.  But with history as our guide, that’s a terrible reason to exit the trade.

When interest rates rose to 0.5% from 0.25% in December 2015 followed by a promise of four hikes in 2016, gold bottomed out and ran from $1,063 to $1,199 by February 2016.

By March 15, 2016, the central bank raised rates by 0.25%.  The price of gold fell slightly to $1,226 before recovering to $1,306 by May 2016. 

By December 14, 2016, gold fell from $1,338 to $1,140, as the Fed raised rates to 0.75% and promised to raise rates another three times in 2017.  Gold would recover to a high of $1,297.

By March 2017, the Fed raised rates another 0.25%.  Gold had just fallen to a low of $1,194 on fears a rate hike would remove the luster.  Shortly after, it would recover to $1,290. 

Then, as markets approached a new rate hike in June 2017, gold prices pulled back to $1,264 on the same fear of interest rate hikes.

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Yet, since 1968, according to Value Walk, “for any given month in which effective fed funds rates rose, gold rallied more than 50% of the time.”  In short, near-term rate hike or not, fear of a sustained gold decline may be overdone.

Another reason gold continues to turn higher is because of uncertainty in the global economy.  Even in the U.S., weak underlying fundamentals and market overvaluation concerns continue to propel the price of gold higher.  U.S. GDP for example may have been revised to 1.2%, but even that’s lower than the 10-year average of 1.33%. 

Coupled with a weak U.S. dollar under Donald Trump, and fears of a gold slump were overdone.

Long-term, gold could rise well above $1,300 an ounce on such uncertainty.  Short-term, though, despite the Fed, there is a technical argument to be made for downside.  As you can see in the chart, RSI, MACD and Money Flow are each in overbought territory.

If we examine a five-year chart, we can see that when that happens, gold does pullback.  Typically, it’s a short-lived pullback, though on a technical set up.  But a sustained pullback on Federal Reserve actions isn’t likely at all.

We have history as our guide.