Most investors have been quite apprehensive about market involvement these while when the trade war is seemingly looming on the horizon. But the equity markets have nonetheless once again defied everyone by creating new height or near new height last Thursday. The most magnificent performer for the week is the spot gold. It has spiked up reaching near 6-year height.
It has helped one of my gold related funds invested since December 2018 to suddenly rise to a profit of 24% as of last Friday record. I believe it will be much higher by Monday, possibly close to 30% since fund pricing is one day delayed. Gold price has spiked much higher by Friday market close. But I am sure there will be other investors who have a much higher profit than mine because my fund didn’t enter when gold price was at its lowest level back then.
The major reason for this market bliss was caused by the Fed minute announcement. The market was actually anticipating an interest rate cut soon by inching up even before the Fed minutes announcement. True enough, the Fed chairmen Powell said the committee has opened up the possibility of a rate cut but he did not mention the date. He said it all has to depend on further economic data. As a result, some speculated that the rate cut will materialize as soon as July 2019.
Chartist Anlytical Views
Looking at the chart of UUP (USD index fund), the index has drifted away from the uptrend channel (green) lines and even dropped below its longtime support line (red color) for the first time. It looks likely; the USD index begins to travel side way from now on if not turning into a bearish trend.
As for the gold futures, charting says it is too much overbought now. Imminent consolidation retrieval is necessary unless another catalyst like an outbreak of the Middle East war may push it even much higher. If not, gold is expected to come down for a while. Therefore, for latecomers, you shall have a second chance to get up this golden bullish train after it has retrieved back.
Fundamentally speaking, I do not see much justification for gold to continue running up as just yet. For one, the rate cut for July Fed decision is still over speculated unless Powell yielded to the pressure by Trump’s political demand. There aren’t enough negative data showing a rate cut necessity as yet. Even if the cut becoming true, it would possibly towards the end of the year according to the conservative mentality of Powell and his committee commitment shown in the past.
Secondly, out of the nine Fed committee members, 8 members voted rate remains as the current stage without change. It takes a drastic drop in the US economy to influence at least 5 of its committee members to vote a rate cut decision for next month. If it fails to cut the rate in July, the market will be greatly disappointed. By then, panic selling will be happening. Both Gold and equity market will drop back from their heights. As a reason, US economic data will be highly watched from now on. All releases will affect market behavior one way or another.
On the other hand, S&P 500 creating new height signifies that the US economy may not be entering slowdown as just yet. It is also expecting a rate cut to stimulate economic activities, as a reason it went up ahead of the announcement. All these spike up are heavily speculative in nature and therefore hardly sustainable.
Possible Future Scenarios
What if the incoming meeting between Trump and Xi is not successful?
Trump will be implementing a tariff hike against the remaining USD 300 billion goods, then the equity market will probably be dropped back due to fear of US economic slowdown, or pushed higher in expectation of an immediate rate cut due to speculation of US economy being dragged down. Gold, on the other hand, will be pushed further hike again if the equity market drops dead.
However, if it is successful, equity markets will rally together with the global market, especially with the Asian. Gold will drop back while seeing USD strengthened in this case.
All the above scenarios can be possibly occurred one way or another. Market once again will be on the highly volatile roller coaster ride. It will be very interesting to watch how the market moves in the coming few weeks. It will never be dull and boring again.
Stay tuned and sit tied with your safety seatbelt on!
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The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions. This write up does not constitute sole advice for an investment decision. Investors are advised to do further reading and research to conclude individual decisions.