GLDI - Gold: Party Is Not Over Just Yet

2023-03-26 11:20:10 ET

Summary

• On Wednesday, the Federal Reserve raised interest rates for the ninth consecutive time and affirmed that its plans for the year remained mostly unchanged, with a possibility of one more increase.
• The Federal Reserve's decision at its latest meeting to leave interest rates unchanged and to continue its monthly asset purchases was widely anticipated.
• Markets think that bank turmoil could trigger a recession that would crush inflation, while the Fed believes that a slowdown is needed to pull inflation down.
• Overall, the Federal Reserve's decision on Wednesday can potentially impact the price of gold and silver, and traders should closely monitor the markets and adjust their strategies accordingly.

Fundamentals

The Federal Reserve's decision on Wednesday can have a significant impact on the price of gold and silver. This is because the Federal Reserve has a direct impact on the value of the US dollar, which in turn influences the price of precious metals.

If the Federal Reserve decides to maintain its current monetary policy and keep interest rates low, this can lead to a weaker US dollar, which typically leads to an increase in the price of gold and silver. This is because precious metals are often seen as a hedge against inflation and a weaker dollar.

On the other hand, if the Federal Reserve decides to raise interest rates or tighten monetary policy, this can lead to a stronger US dollar, which can put downward pressure on the price of gold and silver. This is because a stronger dollar makes these metals more expensive for foreign buyers, which can lead to a decrease in demand.

It is also important to note that the Federal Reserve's decision may not have an immediate impact on the price of gold and silver, as other factors such as supply and demand, geopolitical tensions, and market sentiment can also influence the prices of these metals.

Overall, the Federal Reserve's decision on Wednesday can potentially impact the price of gold and silver, and traders should closely monitor the markets and adjust their strategies accordingly.

Monetary Policy Since 2020

In response to the economic impact of the COVID-19 pandemic, central banks around the world implemented a range of monetary policy measures to support their economies. Here are some of the key monetary policy actions taken since 2020:

1. Interest Rate Cuts: In response to the pandemic, many central banks implemented significant interest rate cuts to stimulate economic activity and support borrowing. For example, the US Federal Reserve lowered its benchmark interest rate to near-zero in March 2020.

2. Quantitative Easing: Central banks also implemented large-scale asset purchase programs, commonly known as quantitative easing, to inject liquidity into financial markets and support lending. The European Central Bank, for example, implemented a €1.35 trillion pandemic emergency purchase program in 2020.

3. Fiscal Stimulus: Many governments also implemented fiscal stimulus measures, such as direct payments to individuals and businesses, to support their economies. Central banks often supported these efforts by providing liquidity to financial markets and facilitating government borrowing.

4. Inflation Targeting: In response to rising inflation concerns, some central banks have shifted their monetary policy frameworks to a more flexible form of inflation targeting. For example, the US Federal Reserve announced in August 2020 that it would shift to a "flexible average inflation targeting" approach, which aims to achieve inflation that averages 2 percent over time, rather than targeting a specific level of inflation.

5. Digital Currencies: Some central banks have also explored the potential use of digital currencies, including central bank digital currencies (CBDCs), as a way to increase financial inclusion, reduce transaction costs, and enhance monetary policy effectiveness.

Overall, since 2020, central banks have implemented a range of monetary policy measures to support their economies in the face of the COVID-19 pandemic. These measures have included interest rate cuts, quantitative easing, fiscal stimulus, inflation targeting, and the exploration of digital currencies. As the global economy continues to recover from the pandemic, it remains to be seen how central banks will adjust their monetary policies in response to changing economic conditions.

Interest Rates and Gold

Interest rates and gold have had an inverse relationship since the COVID-19 pandemic began in 2020. As central banks around the world have implemented measures to support their economies, interest rates have generally been kept low, which has increased the attractiveness of gold as an investment.

When interest rates are low, the opportunity cost of holding gold is reduced, as gold does not pay any interest or yield. As a result, investors may be more inclined to hold gold as a way to diversify their portfolios and protect against economic and geopolitical risks. This has contributed to the upward trend in gold prices since the beginning of the pandemic.

Conversely, when interest rates are high, the opportunity cost of holding gold is increased, which can put downward pressure on gold prices. This is because higher interest rates can provide attractive returns for investors in other assets, such as bonds or equities, which can lead to decreased demand for gold.

Banking Crisis and Gold

Gold has historically been seen as a safe-haven asset during times of financial instability and banking crises.

1. Safe-Haven Asset: During times of banking crises, investors often seek out safe-haven assets such as gold as a way to protect their wealth and hedge against economic and financial risks. This increased demand for gold can lead to higher prices, as investors buy up the limited supply of the metal.

2. Hedge Against Inflation: Banking crises often lead to high levels of inflation, as central banks may implement measures such as quantitative easing or low interest rates to stimulate the economy. Gold is often seen as a hedge against inflation, as its value tends to rise along with inflation.

3. Liquidity: During banking crises, there may be a shortage of liquidity in financial markets, as investors and banks may be hesitant to lend or borrow. Gold is a highly liquid asset, meaning that it can be quickly bought or sold without significant transaction costs or delays.

4. Central Bank Reserves: Central banks may also increase their gold reserves during times of financial instability or banking crises, as a way to diversify their foreign reserves and reduce their reliance on the currencies of other countries.

Overall, gold has historically been a valuable asset during banking crises, as investors and central banks seek out safe-haven assets to protect against economic and financial risks. While the relationship between gold and banking crises may vary depending on the specific circumstances, gold is often seen as a valuable tool for managing risk and preserving wealth during times of financial instability.

Price of gold since 2020

Since January 2020, gold prices have been relatively volatile, with several events and factors influencing its price movements. Here are some of the key events and factors that have affected gold prices during this period:

• In the first quarter of 2020, gold prices experienced a sharp rally as investors sought safe-haven assets amid the outbreak of the COVID-19 pandemic. Gold prices hit a seven-year high of around $1,700 per ounce in March 2020.

• In the second quarter of 2020, gold prices continued to rise, driven by ongoing concerns over the impact of the pandemic on the global economy and increasing geopolitical tensions. Gold prices reached an all-time high of around $2,070 per ounce in August 2020.

• In the third quarter of 2020, gold prices experienced some volatility, with fluctuations driven by factors such as the US Federal Reserve's monetary policy decisions and geopolitical tensions related to the US presidential election. As the global economy began to recover from the initial shock of the pandemic, demand for safe-haven assets such as gold declined somewhat.

• In the fourth quarter of 2020, gold prices continued to fluctuate, with investors closely monitoring the development and distribution of COVID-19 vaccines and the impact of the pandemic on global economic conditions. As the year drew to a close, gold prices were trading at around $1,890 per ounce.

• In 2021, gold prices experienced some volatility, with fluctuations driven by factors such as rising bond yields, inflation concerns, and changes in the US Federal Reserve's monetary policy. Gold prices reached a six-month low of around $1,680 per ounce in March 2021, before rebounding somewhat in the second half of the year. As of the end of December 2021, gold prices were trading at around $1,800 per ounce.

Gold, Over Last 30 days

Over the last 30 days, gold prices have experienced some volatility, with fluctuations driven by a range of factors. Here are some of the key events and factors that have influenced gold prices during this period:

1. Omicron Variant: Concerns over the impact of the Omicron variant of COVID-19 on the global economy have contributed to market uncertainty and increased demand for safe-haven assets like gold.

2. US Federal Reserve: The US Federal Reserve's decision to accelerate its tapering of bond purchases and potentially raise interest rates sooner than expected has put upward pressure on the US dollar, which can put downward pressure on gold prices.

3. Geopolitical Tensions: Rising tensions between Russia and Ukraine, as well as ongoing concerns over the situation in the Middle East, have contributed to market uncertainty and increased demand for safe-haven assets like gold.

4. Inflation: Concerns over inflation, driven by rising energy and commodity prices, have increased demand for gold as a hedge against inflation.

Overall, gold prices over the last 30 days have been influenced by a range of factors, including concerns over the Omicron variant of COVID-19, US Federal Reserve policy, geopolitical tensions, and inflation concerns. As always, traders should stay up-to-date with the latest market developments and adjust their strategies accordingly. As of March 25, 2023, gold prices were trading at around $2000 per ounce, which is relatively stable compared to the previous month.

Let's take a look at the weekly standard deviation report published in Marketplace, Mean Reversion Trading section in order to identity short-term trading opportunities as we come into next week.

GOLD: Weekly Standard Deviation Report

Mar. 25, 2023 1:42 PM ET

Summary

• The weekly trend momentum of 1911 is bullish.
• The weekly VC PMI of 1996 is a bullish price indicator.
• A close below 1996 stop, negates this bullishness neutral.
• If long, take profits 2038 - 2074.
• Next cycle due date is 3.30.23.

Weekly Trend Momentum:

The gold futures contract closed at 2,002, and the market closing above the 9-day SMA 1,911 is confirmation that the weekly trend momentum is bullish. This indicates that the overall trend for gold is upward, and traders who are long on gold are likely to see continued gains in the short term. However, a close below the 9 SMA would negate the weekly bullish short-term trend to neutral, suggesting a potential reversal in the market.

Weekly Price Momentum:

The market closing above the VC Weekly Price Momentum Indicator at 1,949 confirms that the price momentum is bullish. This implies that the price of gold is likely to continue to rise in the short term, and traders who are long on gold may continue to see gains. However, a close below the VC PMI would negate the weekly bullish short-term trend to neutral, indicating a potential change in market conditions.

Weekly Price Indicator:

Traders looking to take profits on shorts into corrections can look to the Buy 1 and 2 levels of 1,960 - 1,918 and go long on a weekly reversal stop. If long, use the 1,918 level as a Stop Close Only and Good Till Cancelled order. This strategy implies that traders who are short on gold can take profits during corrections, while traders who are long on gold can hold on to their positions and look for further gains. Traders can also look to take profits on longs as we reach the Sell 1 and 2 levels of 2,038 - 2,074 during the week.

Strategy:

If long, take profits between 2,038 - 2,074. This strategy suggests that traders who are long on gold can continue to hold on to their positions and look for further gains until the price reaches the Sell 1 and 2 levels of 2,038 - 2,074.

Cycle:

The next cycle due date is 3.30.23, which implies that traders should pay attention to potential changes in market conditions around this time. It is important to note that cycles are not always reliable indicators of market behavior, and traders should always consider other factors when making trading decisions.

Summary, the analysis suggests that the short-term trend for gold is bullish, and traders who are long on gold may continue to see gains in the coming week. However, traders should remain vigilant and be prepared to adjust their strategies if market conditions change.

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