A Plunging Dow and Dollar Weakness Supports Current Gold Rally

Make no mistake, gold has been in a defined rally mode for almost two months. Since the middle of November when gold was trading just under $1,200 per ounce, we have seen a defined and solid uptrend moving gold approximately $100 higher.

Today gold prices are surging, with the most active February Comex contract up over $12 on the day and currently fixed at $1,296.30, a gain of almost a full percentage point. Gold pricing is now within defined striking distance of $1,300, and a move to that price point would certainly generate a faster rally as it would attract more investment dollars, as well as force short players to liquidate their positions.

The underlying forces which have been highly supportive of gold continue to be in play. The current trade war between the United States and China has caused traders globally to witness an economic slowdown in China and Europe, which has, in turn, been a major factor in recent weakness in the U.S. stock market.

The Dow Jones Industrial Average closed near its low today, down 661 points and closing at 22,684.73. News from Apple about its slowing sales and revised earnings estimates contributed to today’s massive selloff. Both the Dow as well as the NASDAQ composite lost nearly 3% on the day.

Dollar weakness was also a contributing factor that was highly supportive of gold pricing. The dollar gave up a little over 6/10 of a percent, and is currently fixed at 95.815.

Market sentiment has also shifted its attention to the Federal Reserve and the pace at which it will raise interest rates this year. Currently, the belief is that the Fed will take its foot off of the gas pedal in terms of raising rates as aggressively as they did last year when they initiated a total of four quarter-point rate hikes in one year.

Last year resulted in the most aggressive monetary tightening the Federal Reserve has implemented. It was the first time that they raised rates on four separate occasions during a calendar year since they ended their quantitative easing program in 2015 and began a monetary policy of quantitative normalization or tightening. These rate hikes are in addition to their current policy of reducing their balance sheet of assets to the tune of $50 billion each and every month. That amounts to a reduction of liquidity of $600 billion per year as they try to reduce a balance sheet that had swelled to $4.5 trillion.

These factors collectively have been at the forefront of what has been a dynamic and sustained rally in gold. As such, we can expect gold to continue to move to higher ground as long as these underlying market forces continue.

Wishing you as always, good trading,