Gold (NYSEARCA: GLD) presented an attractive investing opportunity near $1200 before the U.S. Fed meet. Many investors stayed on the sidelines, fearing that an interest rate hike would push down the price of gold, but they were left bewildered when gold surprised to the upside. In this article, I will discuss why gold jumped following the rate hike and why investors need to get on the bandwagon now before it’s too late.
In my previous article titled Gold: Last Opportunity Before It Races Higher?, I had clearly said that the precious metal would drop to $1190-$1200 and then rebound. At that time, gold was trading at $1226.7 and dropped to touch a low of $1194 before rising again. So, the thesis has played out really well. Similarly, for the SPDR Gold Trust ETF, I had said that the buyers were more likely to enter in the $113-$115 range and that investors would benefit from not creating long positions near $118. The ETF grabbed the attention of investors near $114 and has recorded a sharp reversal.
But, why did gold surge yesterday? An interest rate hike makes the U.S. dollar stronger which, in turn, is a short-term negative for the dollar-denominated commodities. To the shock of many market participants, the U.S. dollar tumbled on the news, providing gold with the impetus. This was the classic “sell on news” event. Keeping aside the dollar’s contribution to gold’s rally, it has to be understood (and accepted) that there was extreme, unwarranted pessimism in the precious metals space. The correction to $1200 had already incorporated the possibility of the rate hike and the dovish economic projections drove away the bears.
The gold futures (April) daily price chart below shows that the market has established $1200 as the near-term support. Following the powerful upmove yesterday, Aurum has breached the 50-day simple moving average of $1216.36 on strong volume. At $1224.5, gold is now ready to test the 30-day simple moving average of $1229.72. I am more confident about gold’s prospects. Now that the final hurdle of the rate hike has been removed, I believe that gold will take out the resistance zone of $1250-$1260 in the coming weeks.
The SPDR Gold Trust ETF followed the precious metal to the upside but with a stronger volume reading. It also crossed above the 50-day SMA of $115.73 and settled at $116.25. Having reversed from near the 50 percent Fibonacci retracement (marked in the chart below), GLD should now strive to take out the resistance zone of $120-$122.
At this point, it might seem like I am extrapolating a single day’s performance into the future. But, the positive action can continue in gold and GLD if the bearish pattern I am watching out in the dollar index (NYSEARCA: UUP) comes to fruition.
The greenback crushed the market participants who were pinning hopes on dollar behaving exactly the way they wanted, i.e. to rise higher. But, the dollar plummeted below the 30-day and the 50-day SMAs of 101.12 and 100.99, sending the bulls packing. Technically, the level of 99.50 in DXY cannot be ruled out.
Coming to the big picture, and perhaps the more important one, an extremely bearish technical pattern known as the Head and Shoulders pattern is taking form on the daily DXY price chart. This is a reversal pattern that indicates of huge losses if the neckline support is breached. For the dollar index, the neckline support is at 99.50. Below 99.50, the dollar index can test 95-96.
Such a fall might look highly improbable at the early stages in a rising rate environment but nothing is written in the stones. So, even if you don’t believe this possibility, at least keep a tab on the action in the dollar index, which is undoubtedly a big factor in short-term market action.
Now is probably a good time to enter into gold but $1200 was better. GLD will also tackle the $120 hurdle in the coming weeks and should take it out. The rate hike overhang has dissipated and brought a relief rally to the gold market.
The action in the U.S. dollar should be carefully watched as a major bearish pattern takes shape. It is hard to call that the greenback will breach its important support in a rising rate scenario but I believe that we should prepare for the unexpected. In case, the dollar corrects, gold and GLD will surge strongly.
I will also be covering Silver on similar lines in my next article. So, if you liked this, then please stay connected.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.