This article was published in Business Times’ column “Chart Point” on 2 April 2018.
Gold Daily Chart Source: Bloomberg, PSR
*Vertical line demarcates the point when the Fed hiked the FFR
The FED has done it again, lifting Gold price up on the day of the rate hike. On 21 March, the FED decided to raise the Fed Funds Rate (FFR) to 1.75% from 1.50%. Instead of seeing a rally in the US dollar and a selloff in Gold, the opposite happened where Gold bottomed out again on the rate hike day. Part of the reason for that was due to the pricing in-mechanism of the market. Prior to the FED rate hike on 21 March, Gold has been stuck in a slumber since 16 February as it retreated off the $1,360 high and stayed range-bound around the $1,300 psychological round number.
Another reason for the bottoming price action in Gold was because the most recent March FED median dot-plot projection for the Fed Funds Rate at the end of 2018 remained the same as the December 2017 projection at 2.25%. The March rate hike can be treated as a dovish hike as the market was expecting some new language of a possibility of four rate hikes this year to no avail.
Since the start of this current rate hike cycle back in December 2015, the market has experienced five rate hikes. All the rate hikes succeeded in forming a bottom on the day of the rate hike or one day later except for the rate hike in June 2017. On average, Gold rallied 14% after the bottoming signal appeared on the day of the FED rate hike. We mentioned a possibility of a bottom in Gold as well in the 11 December 2017 Chartpoint publication that played out perfectly. After the FED hiked 0.25% on 13 December 2017, Gold bottomed out immediately off the $1,240 low and appreciated 8% to a high of $1,360 over the following two months.
Hence, we might be seeing an exact replay of a bottoming price action in Gold now after the FED hiked the FFR on 21 March. Using the average rebound of 14% after the Fed hiked the FFR, the target for this current leg higher for Gold would be $1,500.
Price action wise, Gold looks ready to launch higher too. After moving into a correction mode since 25 January where it hit a high of $1,365, Gold bottom bounced around the $1,300 psychological round number and 50% Fibonacci retracement level. To be exact, the $1,306 resistance turned support area managed to hold Gold up on three occasions shown by the highlighted boxes confirmed Gold is forming a new base off the $1,300 psychological area. Moreover, after the FOMC day on 21 March, the bulls formed a Bullish Engulfing bar that broke above the pullback line suggests the start of the next leg higher.
Keep in mind there is a longer-term bullish formation that is working in the background. Since June 2013, Gold has been developing an inverted Head and Shoulders pattern and the key level to trigger the bullish formation pattern is when Gold closes above the $1,360 neckline on a monthly basis. Hence, it will be interesting to see how Gold closes for the next few months as that will dictate if we see a greater move higher from a longer-term perspective. For the inverted Head and Shoulders pattern, the target for Gold is $1,700.
All in all, Gold looks bullish on the Fed rate hike cycle, near-term and long-term price action perspective.