Gold Looking Precious, Dollar Precipitous

With each passing Fed meeting, it looks very likely that committee members are going to vote to cut rates by year-end. The question is now, "how many?"

The dollar is unloved by its domestic central bank and president, both of which appear to want it lower.

Gold has broken out of a 4-year trading range, and the pent-up energy should propel it much higher in the months to come.

As opined in my article just a few days back "Gold On Cusp of Breakout," the yellow metal would develop wings once it thrusts past the 1,365 resistance. When my piece was published, Gold (GLD) was trading at 1,341. Just three days later, Gold is now trading at 1,383 with today's high at 1,394. Gold is looking precious right now, and looks set to go 100-200 points higher. Gold has been trapped in a very tight range between 1,050 to 1,365 for close to 4 years. A breakout from this containment will likely be extremely forceful.

Source: Tradingview.com

The catalyst was Fed's dovish meeting yesterday, where 8 of 17 Fed committee members anticipated interest rates cuts by year-end. James Bullard was more critical than his colleagues, casting his vote to cut interest rates in yesterday's meeting. The Fed has been amazingly resilient and independent despite Trump's incessant interventions to force the central bank to dial back its rate hike policy. There are theories out there that Trump's final trump card was the trade war he started, which produced enough macro uncertainty to then give the central bank ample reason to cut interest rates without appearing any less independent. Trump can end the trade war as easily as he started it, and he knows it. Lower interest rates and an amicable end to trade tensions with China will undoubtedly give the equity markets a timely boost higher before US presidential election season starts at year-end.

If Trump's motives are to reverse what the Fed has done in 2018 (4 rate hikes), the Dollar is in trouble. The latest Bank of America Merrill Lynch Fund Manager Survey showed that the long Dollar trade was the third most crowded, and undoubtedly many investors have bought the Dollar expecting further rate hikes. With the Fed looking like it was the only central bank in town raising rates last year, the Dollar would have appeared as a precious currency to many. The change in macro winds has taken away the shine from the Dollar, and now it looks precipitous.

Source: Tradingview.com

The Dollar Index (UUP) is facing tremendous resistance around 98, and the sudden U-turn in Fed policy will leave many Dollar bulls entrapped in a currency that both its domestic central bank and president want lower. The Dollar Index has weakened more than 1% against all its peers since the Fed meeting, and looks very likely to fall below its 200-day moving average support.

The twin tailwinds of a weaker Dollar and lower interest rates globally will push Gold higher. A weaker Dollar tends to support commodity prices, while lower interest rates reduces the opportunity cost of holding a zero-yield asset like Gold. All in all, the macro environment is turning, and is creating very favourable catalysts for Gold to push higher. Push higher it already has, as Gold has broken out of its 1,365 resistance that has suffocated it for close to 4 years. There will be a massive amount of pent-up energy in Gold that should propel prices towards the 1,500 to 1,600 levels in the months to come.

Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.