If seasonality were the only factor in play for gold, I would expect gold to languish another couple of weeks or longer. But seasonal trends join a long list of other factors — for gold and every other asset class — in being overwhelmed by the influence of Federal Reserve monetary policy. And the news there is positive for bullion investors, counsels Brien Lundin, editor of Gold Newsletter.
Specifically, the yellow metal suffered along with other sectors after the Fed tempered its rate-hike pause with warnings of continued hikes to come. Subsequent hawkish rhetoric kept any exuberance at bay.
But a funny thing seems to be happening, right now, on the path to Powell & Co.’s next promised rate hikes. With inflation falling according to plan, the markets are looking beyond the central bankers’ next overreaction via continued hikes and considering the big picture. And that big picture is this: By promising one or two additional quarter-point increases, the Fed has essentially announced the end of this rate-hike cycle.
In short, whether we have one or two small increases, this hiking cycle is peaking. Thus, the markets — bonds, stocks, currencies and metals — are beginning to look ahead toward the “next big thing”...which would be rate cuts.
If you’re looking for evidence that everything is driven by Fed policy, look no further than the market reaction to last Wednesday’s muted CPI number. Lower inflation used to be, in a sane world, bearish for gold. These days, because falling inflation promotes a more-dovish Fed, it’s bullish for every asset class, including gold.
So, gold soared $25 on Wednesday, or 1.3%. Silver put its own stamp of approval by leaping nearly a dollar, or over 4%.
All of this is great. But a couple of days of trading wouldn’t be enough for me to consider that gold has already bottomed. So, let’s talk about what else bolsters my case.
Looking at a one-year chart of gold itself, we see that the recent rally has the price challenging the 50-day moving average once again from the downside. A breakthrough would be helpful, but we have another early indicator here...the Dollar Index is in free fall.
I took some heat last month when I warned readers that the drop in the dollar was getting significant, whereupon the greenback immediately rallied back to 103. That has since proven to be merely a countertrend move, as the DXY followed up with a nose-dive.
Importantly, it fell through the 100 level last week, which was important both technically and psychologically (if there’s any difference). After the free fall of the past couple of sessions, the Dollar Index took a breather. But I expect it to renew its drop — and for gold to renew its rise — as investors across the globe continue to factor in a Fed that is likely to lead all other central banks in the interest-rate down cycle.
Bringing it back to my original point, the evidence is mounting that gold has bottomed earlier than we expected. If so, this adds considerable urgency to my on-going recommendation to accumulate the remarkable bargains throughout the junior mining sector.
Recommended Action: Buy junior mining stocks.