Can This Gold Rally Continue?

As the global economy slows and the Fed prepares for a rate cut, there’s reason to be bullish about the yellow metal.

For the past six years, there’s been no number more filled with dread for gold bulls than $1,350 an ounce. 

Barring a few brief spikes, the metal has struggled to break through that level ever since it came off its run-up to $1,900 between 2011 and 2013. 

This matters, because an asset that has few fundamental factors drivingits performance (short of its negative correlation to the greenback) is unusually susceptible to the psychological hocus pocus that can sometimes make technical analysis work.

Thousands of investors believe that $1,350 an ounce is a “resistance level” that gold will struggle to break above. As a result, they’re likely to sell hard as the price approaches that point, and change their view of things if it confounds them by decisively moving higher.

It looks like we’re in that territory now. After a momentary incursion above $1,350 on Tuesday, spot gold decisively broke through on Wednesday afternoon and climbed as high as $1,394 early in the Asian day Thursday. That’s its most elevated level since September 2013.

The question is whether this is just another temporary spike.

There’s some reason to think the best is already behind us. Investors tend to flock to the yellow metal when expectations of economic growth suffer a sharp setback. If you consider flight-to-safety sovereign bond rallies 1 over the past decade, the median peak gain for gold has been 7.2%. This time around, we’re already sitting on an 8% rise. 

At the same time, there are signs of a more dramatic re-evaluation of economic prospects than we saw in gold’s previous pips above $1,350 in July 2016 and March 2014.

Federal Reserve Chairman Jerome Powell opened the door to interest rate cuts as early as next month in a media briefing after the central bank’s policy meeting Wednesday – almost certainly the main reason that gold has been looking so peppy. If the Fed cuts in July, it’s more likely to be by half a percentage point than a quarter-point, Robert Mead, co-head of Asia-Pacific portfolio management at Pimco, told the Bloomberg Buy-Side Forum in Sydney on Thursday.

Should the Fed ease significantly – providing a “Powell put” to bail out an economy struggling under the weight of trade tariffs – you can expect to see a marked weakening of the dollar. That, in turn, ought to be good for gold.

The deteriorating economic picture in Europe should also provide support. Gold doesn’t produce a return, but that’s not the disadvantage it once was in a world where sovereign debt in Germany, Sweden, the Netherlands, Switzerland, Denmark, Austria and Japan – and, perhaps soon, France – provides negative yields. 

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