A potentially bullish signal has appeared in gold as the market anticipates dovish policy from the Federal Reserve.
The 50-day moving average on gold futures (@GC) rose through the 200-day moving average this week. That pattern, ironically known as a “golden cross,” is often viewed as a sign that a longer-term bearish trend is turning more bullish.
Its bounce has occurred at a strong time for the U.S. economy, with job openings outnumbering the jobless and the fewest jobless claims in almost 50 years. Today’s private-sector payroll numbers from ADP confirmed that trend, although there has been some anxiety about the recent government shutdown.
But who cares about that when the Fed is turning dovish? Just a few months ago, central bankers were confidently hiking interest rates. Then came the fourth quarter’s crash and worries about short-term rates squeezing banks, and policymakers started reversing their stances.
The Fed’s new approach, with fewer rate increases, is positive for gold because it weakens the U.S. dollar. Given that commodities are priced in dollars, a drop in the greenback usually lifts bullion metals like gold. And don’t forget about the yellow metal’s historical trading relationship with silver.
Declines in the U.S. currency also tends to lift foreign equities, which we’ve also seen this year.
With another Fed announcement coming later today, investors will be watching for guidance on interest rates and plans for shrinking the central bank’s balance sheet. This essentially refers to unwinding emergency policies enacted after last decade’s financial crisis.
Simply put, balance-sheet reductions less than $50 billion a month would be “dovish.” In other words, similar to keeping interest rates lower for longer.
In conclusion, money has snuck back into gold recently. This has come as sentiment shifts from a “strong dollar” to a “weak dollar” stance. Traders may want to keep an eye on bullion, especially after today’s Fed meeting and Friday’s non-farm payrolls report.