We recently heard from the European Central Bank in what was President Mario Draghi’s final meeting as the head of the ECB. Ms. Christine Lagarde, the former managing director of the IMF, will slide into his seat as the head of the monetary authority in October.
At its September meeting, the ECB cut the short-term deposit rate by ten basis points. The central bank told the market that the central bank would restart quantitative easing to the tune of 20 billion euros in November. The sluggish European economic growth and concerns over Brexit have caused the continuation of dovish policy and have pushed rates to a new low at negative 50 basis points.
The move by the ECB came before the US Federal Reserve met on September 17-18 to decide on its course when it comes to monetary policy. The ECB put pressure on the Fed to cut rates, and US President Donald Trump has not been shy about his feelings on the matter. The President has become more than frustrated with the Fed. In a recent tweet, he referred to the members of the committee as “boneheads.”
The gold market was sitting and waiting to hear from the Fed as the guidance and interest rate cuts in June and late July fueled the recent rally. Gold had risen to its highest level since 2013. The most liquid gold ETF product is the SPDR Gold Shares (NYSE:GLD).
The Fed cuts rates as expected
On September 18, the US Federal Reserve cut the Fed Funds rate by 25 basis points. The central bank remains divided on the direction of rates as the vote was 7-3. Two members of the committee, Eric Rosengren and Esther George once again voted against a rate cut as they did on July 31. The economists believe that the strength in the US economy does not require lower short-term rates at this time. Meanwhile, James Bullard was the third dissenter, but he favored a 50-basis point rate cut because of the uncertainties facing the global economy.
Gold’s kneejerk reaction was to fall in the aftermath of the Fed meeting as the 25-basis point move disappointed some market participants.
As the daily chart of December futures illustrates, the price of the yellow metal fell to a low at $1490.70 in the aftermath of the rate cut. By the end of the week, gold was back above the $1520 level and price momentum, which had declined into oversold territory after the recent correction, turned higher. Open interest, the total number of open long and short positions in the gold futures market, remains near a record level at over 632,000 contracts at the end of last week.
Rates continue to fall around the world
We have now heard from both the ECB and US Federal Reserve, and the bottom line is that both central banks cut interest rates. Falling interest rates make gold a more attractive investment vehicle. While gold offers no yield, that does not matter these days given the low level of returns on cash. In the US, the short-term rate is now at 1.75%-2.00%. In Europe, with rates at negative 50 basis points, gold does not lose value over time, but euro deposits have become decaying assets.
Gold competes with fixed-income instruments. Historically low rates and the trend that indicates they are likely to continue to decline means that currencies are becoming less attractive each day. Moreover, the ECB will restart quantitative easing in November, which amounts to running the printing presses and printing more euros. Gold has a long history as a store of value, and in the current environment that is the most bullish factor for the yellow metal,
Lower rates and trade concerns are bullish for gold
Alongside falling interest rates, a breakthrough trade agreement between the US and China is not on the immediate horizon. We will likely see more than a few ups and downs on the trade front over the final quarter of 2019 and into 2020. The fear of a global recession will continue to push interest rates lower, and cause periods of risk-off where market participants run to safe-haven investment vehicles. Since June, gold has been one of the best-performing assets in the world. The yellow metal has been in a bull market since the early days of this century when it took off from under $300 per ounce.
The correction in gold has taken the price from $1566.20 to a low at $1490.70 on the December futures contract. Technical support remains far under the market at the $1377.50 level, where it broke to the upside in June. The current period of price consolidation is healthy for the gold market. I expect that we will see new highs and a move to the $1600 level or higher by the end of 2019.
The SPDR® Gold Shares (NYSE:GLD) was trading at $143.49 per share on Monday afternoon, up $0.54 (+0.38%). Year-to-date, GLD has gained 16.05%, versus a 12.35% rise in the benchmark S&P 500 index during the same period.
GLD (NYSE:GLD) currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #1 of 33 ETFs in the Precious Metals ETFs category.