Gold Bulls’ Joy: The Bad News Isn’t Bad Enough for the Fed to Do More

© Reuters.

By Barani Krishnan

AiVIF.com -- The bad news on the economy seems to be getting a little ‘badder’ each day.

The bad news for gold bears though is that the Fed doesn’t seem to be taking it too badly. The central bank is most likely sticking to a half-point rate hike in June instead of a three-quarter point increase that would have taken the yellow metal’s implosion to the next level.

That has allowed the Dollar Index, gold’s nemesis, to slip from the 20-year highs above 105 in early May to a little just above 101 — a drop of more than 3%. Bond yields, measured by the Treasury’s 10-year note, have also been plunging, dropping almost 3.7% just on Tuesday alone and heading for a third straight week of losses. That’s good news for bullion’s bulls.

At Tuesday’s settlement, front-month gold futures for June on New York’s Comex was at $1,865.40 per ounce, up $17.60, or almost 1%, on the day.

Earlier in the session, the benchmark gold futures scaled a peak of $1,868.80 — its highest in two weeks. What’s more, June gold has managed to stay in the green for a fourth session in a row, its longest since a five-day winning streak between April 7 and 13, that coincided with Tuesday’s two-week high.

Gold’s current trajectory could put it on track to regaining the $1,900 perch, even if just momentarily, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

The weekly and daily stochastics of gold are supportive of an up move targeting the 50-Day Exponential Moving Average of $1,884 and the 100-Day Simple Moving Average of $1,886, as well as the weekly middle Bollinger Band of $1,890, said Dixit, who bases his calls on the spot price of gold.

“The current uptrend can extend to $1,900 and $1,910 where the momentum can be exhausted,” added Dixit. “On the event of correction, the 200-Day SMA of $1,839 can act as strong support.”

Ed Moya, analyst at online trading platform OANDA, held a similar view.

“Non-interest bearing gold is a safe-haven again and it could be on the verge of a major breakout if prices can recapture the $1885 level,” said Moya. “A peak in Treasury yields is in place and now the dollar looks like it is ready for a pullback as the ECB is ready to raise rates which is good news for the euro.”

He said gold should remain supported as inflationary pressures weigh, China’s Covid situation remains a big unknown, and corporate America continues to slash outlooks.

“There might be no stopping gold right now as the wall of worry on Wall Street continues to grow,” said Moya. “The US economy is not falling apart, but the weakness it is experiencing is much worse than many expected.”

One indicator of that worry: Monthly sales of newly-built homes in the United States, which fell to a two-year low in April, according to data from the Commerce Department on Tuesday that reinforced the notion of a housing market slowing from surging interest and mortgage rates.

The new-home sales numbers came on the heels of data from last week that showed sales of existing homes in the United States down for a third straight month in April as interest and mortgage rates rose. Prior to that, the National Association of Home Builders said home building sentiment — a gauge of domestic construction activity — hit two-year lows in its early survey for May.

Housing and real estate have important roles in the U.S. economy, with roughly 65% of occupied housing units being owner-occupied and making homes a substantial source of household wealth and home construction a key provider of employment. In the 2008/09 financial crisis, a crash in the housing market precipitated what later came to be known as the era of the Great Recession.