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Gold breaks through US$1,400 thanks to Fed's dovish tone

Gold broke through the US$1,350 level recently.
Gold broke through the US$1,350 level recently.

'The Fed's statement was basically the last match the bonfire needed'

It’s taken six years for gold investors to put their mallets down, as George Milling-Stanley puts it.

Each time the price of gold poked its head above a technical level of US$1,350 an ounce, speculators would immediately take profits and slam it back down, he said. The last three times prices hovered above that level in intraday trading, they couldn’t hold it until close.

“(Investors) have effectively been playing whack-a-mole with gold,” said Milling-Stanley, head of gold strategy at State Street Global Advisors. “They didn’t do that this time because they probably were very impressed by (Jerome) Powell’s statement.”

For the first time since 2012, gold isn’t just hovering around the US$1,350 level — it has shattered it, trading as high as US$1,421 on Monday. The surge began immediately after Powell, the Fed chairman, opened the door for an interest rate cut in the U.S. on Wednesday.

Gold has historically moved in the opposite direction of U.S. interest rates. When rates are cut, the U.S. dollar weakens and investors turn to gold instead. The precious metal has also historically acted as a safe haven, and amid uncertainty over the U.S.-China trade war and the possibility of a physical confrontation between the U.S. and Iran, all the boxes but one were checked for a rally.

“The Fed’s statement was basically the last match the bonfire needed,” Milling-Stanley said.

The rally has signalled a regime change, according to Scotiabank commodities strategist Nicky Shiels. Gold attempted to break the US$1,350 level about six times in the last four years alone — a period that marked a bear cycle for bullion. Now, that level has gone from being gold’s ceiling to its floor, she said.

A rate cut has not been announced — although most expect at least one to occur in 2019, given Powell’s dovish comments — and yet the market appears to already be pricing one in, Shiels said. That might cause some investors to worry about a lack of catalysts going forward, especially if tensions between the U.S. and China and the U.S. and Iran begin to numb.

Gold might not continue its rally on the announcement of a rate cut alone, should one happen later this year, but any additional outlook that Powell provides for the future may be enough to spark further excitement for the precious metal, Shiels said.

“The Fed doesn’t hike or cut in one-offs,” Shiels said. “They normally do it in cycles so I’d really look at the messaging after the cut to determine how dovish the outlook is.”

In this scenario of a rate cut, should Powell leave the door open for even further easing, Shiels said that US$1,400 would likely become the new floor for bullion, which could rise as high as US$1,500.

The Fed doesn't hike or cut in one-offs. They normally do it in cycles so I'd really look at the messaging after the cut to determine how dovish the outlook is.  - Nicky Shiels, Scotiabank commodities strategist

Strategic Analysis Corp. chairman Ross Healy is betting that the bounce from US$1,350 to US$1,400 was only the first leg of the rally. Before the latest Fed update, the average portfolio at Healy’s firm already had a minimum exposure of 15 per cent to gold, he said.

As prices surged so too did the Canadian mining stocks in his portfolio. They’re an obvious play, he said, because any upward move in gold prices would add  to the miners’ bottom lines. Healy did not trim his positions in Barrick Gold Corp., Kinross Gold Corp. and Alamos Gold Inc. to take profits.

“That’s no way to grow a portfolio,” said Healy, explaining that he added to his positions as he saw prices rise.

Since Wednesday close, Barrick is up more than 10 per cent while Kinross and Alamos investors are enjoying seven and 9.5 per cent rallies respectively. But Healy really sees an opportunity in junior miners. He recommends the Van Eck Vector Junior Miners ETF, which is up more than nine per cent since Wednesday, for investors who don’t want to invest in individual names.

Milling-Stanley is admittedly more cautious when it comes to the rally and warns investors intent on playing the rally that they can get burned. He’ll stay on the sidelines until the markets prove they can sustain the current level.

“I’m believing that we have moved into new high territory but I want the market to confirm that,” he said. “I’m not convinced it’s going to happen yet.”

Copyright Postmedia Network Inc., 2019

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