The financial markets have been on a wild roller coaster ride over the last 48 hours. Yesterday the Fed announced it has cut its Fed funds rate by ¼%. This put strong and dramatic pressure on gold prices as the most active December futures contract fell to a low of $1412.10. This also sent U.S. equities lower yesterday as the Dow traded down 466 points at the low before recovering slightly. As we have noted recently, in anticipation of a Fed rate cut both stocks and gold had moved in tandem.
Typically, a strong equities markets creates a risk-on market sentiment which causes market participants to move some of their investment dollars from the safe haven asset class into stocks. Inversely when stocks trade under pressure, many market participants move money from equities into a safe haven asset such as gold or the U.S. dollar.
One exception to this rule is when the Federal Reserve raises or cuts interest rates. Rate cuts by the Fed are seen as extremely bullish for both asset classes. Recently in anticipation of Fed action resulting in a rate cut traders had taken both stocks and gold prices dramatically higher in tandem.
The inverse correlation between gold and equities returned today as market participants reacted to a series of tweets sent out by President Trump. Today he announced his plan to put a 10% tariff on the remaining $300 billion of goods and products coming from China into the United States beginning on September 1st. This announcement created strong selling pressure in U.S. equities and strong bullish market sentiment in gold prices. This decoupled the tandem move, and signaled a return to the negative correlation most commonly seen in these two asset classes.
As of 10:15 PM EDT gold futures are trading up $18.40 with the most active futures contract fixed at $1456, a 1.3% gain. Not only is today’s closing price the highest value in gold this year, it is also the first-time gold has reached this price point since 2013. A close well above resistance which occurred at around $1440, the recent highs in gold.
U.S. equities continued to move lower for the second day in a row, with the Dow Jones Industrial Average closing down 280.85 points and currently fixed at 26,583.42.
Our upside target for gold remains at $1480. This is based on a .618 % Fibonacci extension of the major rally which began at the end of May, until the end of June when gold pricing found resistance at $1442 per ounce. The former resistance of $1442 should now become support for gold pricing.
Wishing you as always, good trading,