How Will Gold Trade Now That The Federal Reserve Is Trapped?

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The stock market took a hit on Friday, following the simply awful CPI numbers that came out on Wednesday. JPMorgan reported disappointing earnings too, admitting that the “high” interest rates are hurting the amount of money it is making on deposits. The problem is interest rates are not too high when inflation ticks up.

The stock market took a hit as well, posting its biggest one-day drop all year on Friday. It looks like it is in a bit of a corrective mode now, but it may just move sideways for a few weeks.

Gold also put in a reversal day on Friday, as it soared through the $2400 level to reach $2450 before it fell back down, recording a 100-point intraday swing.

I got a few emails from people asking if this is the end of the gold run. I don’t think so, but it’s likely to now consolidate for a few weeks before going higher. Take a look at the last two times that it witnessed reversal days, which I have circled on the chart, to see how it is is likely to trade for the next few weeks.

In December, gold had a reversal day and then fell into the December Fed meeting, after which it went sideways until the end of February. Then, in the middle of March, it had a reversal day with an almost 100-point swing, before it started up again in just a few days.

It traded in a 100-point range both times, with the $2100 mark as resistance, followed by the $2200 level. Now, it looks like $2400 is the new price resistance level, and somewhere in the $2250-$2350 range is likely to become price support.

I don’t think it’s going to pause for a few months here, like it did after that December reversal, but it’ll probably take more than just a week to make another big rally. I’d guess four to six weeks, but we’ll see.

Gold is going to go up again, because the Federal Reserve is now trapped. This week’s CPI report is so important, because it showed an uptick in inflation instead of a downtick, coming in at an annualized 3.5% rate, with “supercore” components well above 4%. This report put the Federal Reserve in a trap.

It can’t raise interest rates anymore because of the size of the growing government debt, and this report makes it so that it certainly should not lower rates, either. Inflation simply failed to go down like the Federal Reserve predicted it would. On 60 Minutes, a few months ago, Jerome Powell predicted that CPI would fall down below 3% for a few months, and then he would lower interest rates by “mid-year.” Now that’s thrown out of the window.

This creates a scary situation, because what if inflation gets worse and the Federal Reserve feels it can’t hike or if there is a real need to lower rates, and then inflation just explodes? However, don’t forget that the anticipated interest rates cuts have been pushed out into the future before, and it didn’t stop the stock market bulls from buying.

I think it’s important to think about the big picture for gold, and not just the action of the past week. Here is the current chart of the PHYS physical bullion ETF, which I have held a core position in for the past few years.

I had a 14% investment allocation position in my accounts going into the final day of February in gold and silver metals ETFs, such as PHYS, PSLV, and CEF. In the last hour of Friday, I boosted that. On the first day of March, I dramatically added more, and I also purchased a position in the GDX gold stock ETF, as well as multiple individual big-cap mining stocks.

I did most of this buying in the two areas I circled on the provided chart above. I bought BCIM in March too, which is an industrial metals ETF. I still have a little over 50% of my money in bonds, CDs, and cash, which gives me flexibility to do other trades or positions outside of gold and commodities later.

I have done no more buying in gold, silver, or mining stocks this month, and I am not looking to do any more trading in them for a long time. I did buy a small PALL/palladium position, but it doesn’t amount to much. I will talk more on that in a moment.

With Friday’s pullback, we may get a nice sideways consolidation period for a few weeks for people who do not yet have a position. However, the fact that gold, silver, and the GDX have just recently broken above their upper 200-day Bollinger Bands suggests that this move could be strong all year and last well into next year, and maybe even beyond that.

To see what I mean, gold may trade up like it did back from 2009 to 2011, as an example of how it can get going when it’s in a bull cycle.

Notice the area I circled was a breakout of the $1000 area on gold, which had been a key resistance point for it back then, just as the $2100 level had been one until recently – and $26 was for silver for almost two years.

Gold simply rode up its 200-day moving average during that big rally, as seen on this chart, which lasted for two years.

That’s classic stage two bull market behavior. During bull markets, the 200-day moving average often acts as a great long-term buy point, where you just buy when you get near it and put a 5%-10% stop loss order in.

So, if you missed the recent entry points in gold, silver, and mining stocks, I’d suggest you take a look at that 2008-2012 chart of gold for ideas on what to do now. Here is a look at gold from 2001 to the end of 2008 as another example.

I’m personally not worried about a gold correction here because I bought at a lower level with a good entry point, and I am diversified, not on margin, or playing call options or futures.

As you may know, I was posting frequent YouTube videos since the start of the new year, telling people to buy gold, buy silver, and do some silver stacking below $26.00. Now that precious metals and mining stocks have broken out and that entry point is gone, right now I have lost interest in doing YouTube videos for the time being.

Now, I am just holding my positions and putting myself in a mode of just looking over things every few days to find another great trade. So, I’m going to slow down and take a little bit of a break, in a sense.

I wrote about two ideas recently – China and Palladium. I actually would prefer that they enter some sort of stage one basing phase before they really go up, one which goes on for a long enough time to cause the width of the 200-day Bollinger Bands to contract together.

If that happens, then I may buy more and really bang the drum on them, but it would take awhile for that type of setup to materialize, with the China idea perhaps taking into the end of the year or next year for it to really line up.

The China market took a hit Friday, so I may have been early on looking for it to break through its 200-day moving average. It’s a situation I need to watch and study more.

There is a big “managed money” hedge fund short position on Palladium, but perhaps it can get even bigger if it just trades sideways here for awhile. I’d like to see it do that for a few months, actually, and then I’d get excited about it.

It’s possible that could happen, because palladium has historically lagged the rest of the precious metals complex in past secular bull markets, and it has lagged on this metals breakout, too. As you can see, from the correlation indicator on the bottom of this chart, it has not been trading with the price of gold.

So, if palladium goes sideways for a few months, I may buy more. If it just goes up, I’ll simply hold the small position I already have in it. I’m also just watching the stock market for now, and I want to see how it trades out for the next few weeks.

I have no real opinion yet of whether we are going to get a simple pause in the big rally that began last October, or the makings of an important top here. If I see topping signs, I’ll let you know, but I really don’t think much is going to happen for the rest of this quarter. My guess is the market may dip a little more here, but it is likely to firm up by the end of the week and simply go sideways for awhile.

More By This Author:

Here Are Three Commodities Set Up For Big Short Squeezes
Here Are Trades To Play New Gold/Commodity Bull Market
Gold Hits New High As Federal Reserve Turns Super Dovish To Set Stage For Coming Bubble Bust

I took the phrase “The Federal Reserve is trapped” from this YouTube interview of William Fleckenstein.

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Daniel Robertson 1 month ago Member's comment

Well done.