It is an odd occurrence when U.S. equities and the precious metals complex run in tandem and gain value at the same time. Typically, investors favor either the risk-on asset class, or the safe-haven asset class, moving capital between the two depending on the market environment. That is exactly what we are witnessing in the financial markets.
One exception to that rule is periods when the Federal Reserve is deeply immersed in monetary stimulus through asset accumulation and interest rate reductions. Recently the Fed has been doing just that. They have increased their monthly assets adding about 60 billion per month to their balance sheet. They have also cut rates a total of three times in 2019. The recently released Federal Reserve “dot plot” also indicated that they plan on leaving interest rates where they are throughout 2020.
The current Federal Reserve monetary policy is partially responsible for the current scenario resulting in a Christmas Rally for both stocks and gold.
Gold has just recently woken from a slumber which kept prices contained to a defined and narrow range. As recently as the middle of November gold prices dropped to a low of $1446, as it fell from this year’s high at $1565. Through the remainder of November gold remained trapped in a range from $1450 to $1481. The first sign that gold was about to break out of it sideways trading range occurred at the beginning of December when pricing moved above the upper range, but was limited as gold could not break above its 50-day moving average.
The results of this price action created a pattern that we identified as a bullish pennant formation. This pattern can be defined as a market that trades with a series of lower highs, and simultaneously higher lows. Also known as a compression triangle the belief is as the range compresses, energy builds until it reaches the apex of the triangle.
At that point technical traders look for a dynamic market move as the energy is released. Although pricing can break either higher or lower, typically it will favor breaking to the prevalent trend direction which in the case of gold has been higher.
On a technical basis we have seen significant confirmation that the current gains in gold could easily continue to higher pricing. On December 19 gold hit a high that is equal to the upper resistance trendline created from the pennant formation, on the same day gold closed above its 50-day moving average for the first time since October 31. Then on December 23 gold pricing broke above the pennant formation, closing at its highest price point since November 6. This rally continued on December 24, Christmas Eve when gold gained in double digits and closed above its 100-day moving average, as well as the 23.6% Fibonacci retracement at $1497. In fact, on that day gold managed to gain enough momentum to close solidly above $1500 at $1505.70. Today gold continued this dramatic rise gaining $11.20 with the most active February futures contract currently trading at $1516.00. Although there is minor resistance at $1520 and at $1540, major resistance does not occur until the yearly high of $1565.
Wishing you as always, good trading,