- Gold has just completed its worst month since November 2016.
- The Fed raised the rate eight times in the two years following November 2016.
- The Fed started to shift into a cutting cycle in 2019, and Gold prices began to rise. This continued through the pandemic , which reached an all-time high in August 2020.
- Are markets sending out another signal that the gold bullish cycle is over, with Gold prices moving in a bearish direction around the June FOMC rate announcement?
The gold prices were in an uneasy state as of this week. It had suffered its worst month since November 2016. This was the month that Donald Trump won the US presidency. Markets also welcomed the hope of’reflation’.
The FOMC raised rates eight times over the next few years. The FOMC hiked rates eight times over the next couple of years. Gold traders were aware of this and the drubbing in Gold prices following the election, but before the rate hikes proved to have been prescient.
The end of the Fed’s hiking cycle didn’t go smoothly. That’s what triggered the current bullish Gold cycle. Jerome Powell was asked by Powell where he believed the neutral rate was in October 2018, after the Fed had increased seven times over the previous two years. The neutral rate is a theoretical rate at which FOMC policy is neither restrictive nor stimulative. This is a bit of a “goldilocks” number. Chair Powell replied that this was “a long way away”.
It was generally believed that this meant that the FOMC planned for more rate increases. In fact, after hiking for the eighth consecutive year in 2018, the Fed forecasted two additional hikes in 2019. Shortly thereafter, risk markets flooded over with concern that the Fed would raise rates into a recession.
These 2019 rate hikes didn’t happen. The Fed reversed course and cut rates three more times in 2019. The gold markets proved to be prescient once again as prices began to rise from Jerome Powell’s statement that he believed that the neutral rate was “a long way away”.
GOLD MONTHLY PRICE CHART: RATE CYCLES DIVING MARKET
THE BULLISH CYCLE NOW IS IN QUESTION
On the heels of Chair Powell’s hawkish comments, the current bullish Gold cycle began in Q4 2018. Following Powell’s comments, equity markets began to fall as the US dollar posted a strong gain in October. After the December rate decision, the Fed raised again and warned of two more hikes in 2019, the equity sell-off grew.
The pain trade continued into Christmas, when Fed-speak began to soften. This trend continued through Q1 2019. This was occurring as markets calmed from fear of excessive tightening. Gold prices started to fall, and a strong surge in June 2019 saw the Fed open the door for rate cuts.
The Fed cut three times in 2019, as opposed to the two rate hikes they had forecast at their December 2018 rate decision. This helped to buoy Gold prices into 2020.
However, the next year was a total surprise as Covid took over the world. Buyers took control of the market after a knee-jerk response in March. This was helped by the abundance of stimulus that was being pumped into the system. This allowed Gold prices to rise aggressively, setting a new all-time high in August 2020.
However, things began to change after the high. The pullback that began as a pullback became more aggressive when the news about promising vaccines made headlines. One week after the election, it was November 9th, last year. Gold prices saw a substantial drop, giving that pullback more of an aggressive tone. As hope permeated, the horizon,
GOLD: WHERE ARE WE NOW?
There was much to love about the long-side of Gold up until the FOMC rate decision two weeks ago. The bull flag formation still exists after nine months of prices falling back from the all-time high.
The price action formed a double bottom in March. This is often done with the intention of bullish reversals. Prices eventually broke out of the bearish channel in April and May, giving rise to bullish hypotheses that suggested the possibility of new highs.
This potential was even present in the FOMC rate decision. Prices pulled back to a key support zone before the announcement.
