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Gold Breaks Out and the Rally Continues

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taking a brief hiatus and consolidating, the major rally in gold has reignited. Today gold prices surged, trading up approximately $17, as of 3:30 Eastern Standard Time. This takes pricing to the highest level seen since November. Apparently this rally was initiated due to a weakening US dollar and a nebulous timeframe for the Fed’s next interest rate hike.

According to MarketWatch, “Fed minutes released Wednesday did not indicate any firm resolve on the part of the central bank to hike interest rates soon. The lack of clear signal from the Federal Reserve in monetary policy pressured the dollar which helped to boost appetite for dollar-denominated assets such as gold.”

On a technical note, today’s strong upside rally in gold moved prices well above our identified resistance level at $1242. This resistance level was created using a Fibonacci extension from the onset of this rally, beginning at the end of December of 2016. It culminated with a $100 price advance in mid-January. From mid-January until the beginning of February, gold prices corrected to $1180 per ounce. We are now in the second leg of this rally and based upon our current technical models, it should culminate with gold prices at least at $1280 or higher.

Risk-On and Risk-off Asset Classes Move in Tandem

As we have spoken about on many occasions, there is an intrinsic negative correlation between risk-on and risk-off asset classes. Therefore, by their nature, these asset groups will tend to run in opposite directions. However, there are times when these investment types will run in tandem, with both moving to higher ground. The greatest example of this was the quantitative easing initiated by the Federal Reserve in 2008 – 2009. Immediately following the start of QE1, both gold (risk-off) and US equities (risk-on) began one of the most substantial upside moves ever witnessed. From 2009 till the middle of 2011, both gold and equities traded to new historical highs, with gold prices roughly doubling and trading to its historical high above 1900.

In fact, the rally we are currently witnessing in US equities can be traced back to its beginning run in 2009. The fact that these asset groups are running in tandem illustrates current market sentiment. Traders are reaching for the sky (risk-on), but keeping a foot firmly planted on the ground (risk-off).

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer