GLDM - Gold: Interest Rates Peaking During A Seasonal Bottom Could Be Explosive For Prices!

2023-10-23 13:03:35 ET

Summary

• Federal Reserve official Raphael Bostic does not expect interest rate cuts until well into 2024.
• The market's assessment has shifted away from the possibility of a rate increase during the upcoming FOMC meeting.
• Bostic's comments could potentially put downward pressure on gold prices due to expectations of higher interest rates and reduced inflation expectations.

Fundamentals

Atlanta Federal Reserve President Raphael Bostic on Friday said he doesn't envision interest rate cuts happening until well into 2024.

He emphasized that it's unlikely for interest rates to be reduced before the middle of the next year, at the earliest. He also stressed the importance of keeping people aware of the current inflation rate, which stands at 3.7%, while their target is 2%. He underscored the need to get much closer to the 2% target before even considering a change in their stance.

In light of several recent speeches by Federal Reserve members, including Chair Jerome Powell's comments on Thursday, the market's assessment has shifted away from the possibility of a rate increase during the upcoming FOMC meeting on October 31-November 1. The likelihood of an increase in December is only 25%, according to the CME Group's Fed Watch Tool, which tracks pricing in the fed funds futures market.

The financial markets are currently expecting the potential for two or three quarter-point rate cuts by the end of 2024. One potential reason for the Fed to contemplate reducing rates would be a slowing or recession in economic growth. Although Bostic mentioned that he doesn't anticipate a recession, he did acknowledge changing economic conditions, with business contacts indicating their preparations for an economic slowdown.

He made it clear that his outlook does not include a recession, but he does foresee a slowdown in economic activity, and he expects inflation to eventually reach the 2% target. Bostic made these comments in the context of significant movements in financial markets, especially in Treasury yields. While the benchmark 10-year Treasury yield (US10Y) briefly surpassed the psychologically significant 5% level earlier in the session, it subsequently moderated and was most recently trading around 4.97%.

Effect On Gold Prices

Gold prices are influenced by various factors, including interest rates and inflation expectations. Here's how Bostic's statements could impact gold prices:

1. Interest Rates: If Bostic's comments suggest that the Federal Reserve is unlikely to cut interest rates until late 2024, it could signal a prolonged period of higher interest rates or a stable interest rate environment. In such cases, investors may find alternative investments, such as bonds or savings accounts, more attractive than non-interest-bearing assets like gold. This could put downward pressure on gold prices.

2. Inflation Expectations: Bostic mentioned that the Federal Reserve is still working to achieve its 2% inflation target. If investors interpret his comments as a sign that the Fed is determined to maintain its inflation-fighting stance, it could dampen inflation expectations. Gold is often seen as a hedge against inflation, so reduced expectations of inflation could lead to weaker demand for gold and potentially lower prices.

3. Market Sentiment: Gold prices are also influenced by market sentiment, which can be affected by comments from central bank officials. If Bostic's statements are perceived as dovish (indicating a less aggressive approach to monetary policy), it could boost market sentiment and provide support to gold prices.

It's important to note that the relationship between central bank statements and asset prices is complex, and many other factors also come into play, including economic data, geopolitical events, and currency movements. Therefore, while Bostic's comments can have an impact, they are just one piece of the puzzle when it comes to understanding and predicting gold price movements. To get a more accurate assessment of the situation and its effect on gold prices, let's take a look at the weekly standard deviation report published in the Market Place section as Mean Reversion Trading and see what short-term trading opportunities we can identify.

GOLD: Weekly Standard Deviation Report

Oct. 22, 2023 9:26 AM ET

Summary

• The weekly trend momentum of 1932 is bullish.
• The weekly VC PMI of 1974 is bullish price momentum.
• A close below 1974 stop, negates this bullishness neutral.
• If long, take profits 2028 - 2062.
• Next cycle due date is 10.30.23.

• Executive Summary: The gold futures market exhibited notable trends throughout the week, characterized by key indicators signaling bullish momentum. This report provides a comprehensive analysis of the market's performance and outlines recommended trading strategies.

  1. Closing Price: The gold futures contract concluded the week at $1,994.
  2. 9-Day SMA: The market maintained a position above the 9-day Simple Moving Average ((SMA)) at $1,932, affirming the presence of a bullish weekly trend momentum.
  3. Trend Reversal: It is crucial to observe that a close below the 9 SMA would alter the short-term trend from bullish to neutral, warranting a cautious assessment.
  4. VC Weekly Price Momentum Indicator (VC PMI): The market successfully closed above the VC PMI at $1,974, confirming a bullish price momentum for the week.
  5. Trend Reversal: Conversely, a close below the VC PMI would neutralize the short-term bearish trend, necessitating vigilance in trading decisions.
  6. Profit-Taking for Short Positions: Traders with short positions are advised to consider taking profits during corrections within the price range of $1,940 to $1,867.
  7. Long Position Strategy: Opportunities to enter long positions are favorable upon the emergence of a weekly reversal signal.
  8. Risk Management: For long positions, it is recommended to establish a Monthly Stop Close Only order at $1,867 and consider implementing Good Till Cancelled orders.
  9. Profit Target: Profit-taking should be considered as the market approaches the $1,900 levels during the month.
  10. Next Cycle Due Date: The forthcoming cycle is anticipated on October 30, 2023.
  11. Long Positions: Traders currently holding long positions are encouraged to contemplate profit-taking in the range of $2,028 to $2,062.

This comprehensive analysis underscores the significance of monitoring key indicators and adhering to prudent risk management practices. As always, please exercise due diligence and consider market developments when executing trading strategies.

Your adherence to these recommendations is essential for maximizing potential gains while managing risk effectively.

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