The Fed

In a prior post, we described a nice “Gold Rally” as the price of gold had bottomed near $1,206.00 and in a strong move reached $1,255.00 in short order.  Since then, a famous Wall Street analyst has recommended it but more importantly – the threat of war was a real possibility.  The possibility of a North Korean attack on Guam, which could have led to a major conflagration, led to another advance in gold to $1,298.10 and closed the week with solid gains.

Tensions between North Korea and the US cooled over the weekend, which has led to a small pullback in the precious metal.  To be sure, there are other reasons to invest in gold as noted by an UBS analyst: “Overall, we think there are enough macro factors to keep gold supported. The recent softness in inflation data and downside risks to upcoming releases should help sustain the uptrend, especially to the extent that this creates uncertainty around Fed policy expectations.”

Why would this analyst consider Fed policy actions? Because the Fed is claiming that it will continue to hike rates this year, however, not many people on Wall Street still believe that.  The Fed says it wants inflation rates back to 2%, but it’s favorite inflation metric, the core PCE deflator, has been below their target and falling.

January = 1.9%

February = 1.9%

March = 1.6%

April = 1.6%

May = 1.5%

June = 1.5%

For the Fed to meet the goal of 2% inflation, there needs to be a lot of it real soon, and nobody believes that’s going to happen.  So how does this help gold prices rise even further?  Well, if the Fed stops raising interest rates, that will not help the US dollar appreciate and would most likely make it fall.  And if the US dollar is falling, it means we should expect a higher dollar price for gold.

As I mentioned earlier, the recent high in gold was $1,298.10. Prior highs were very close to this same price and we believe that when gold is over $1,300.00 per ounce, it will make a strong advance of several hundred per ounce.  If you own gold, great, but maybe you should buy more.  And if you don’t own gold, you should buy it before it makes that advance over $1,300.00 per ounce.