The Fed Sounds the Inflation Starting Gun for Gold

What a wild week for gold. Thursday alone saw the yellow metal up more than $30 at one point, and down more than $25 at its lowest. Then, by Friday, we saw gold and silver both trade higher. What is an investor to make of this?

It’s plain to me that gold is doing some correcting after making a high over $2,000 an ounce earlier this month then being unable to hold it. But is the gold rally finished?

Hell, no! It has made a historic rally since the beginning of the year. Now, gold has entered into a necessary consolidation period. This is a healthy correction that will help gold maintain its long-term uptrend.

I think the smart thing to do is to make shopping lists for when the bottom comes. And it could come sooner than later because the Fed is on the side of the gold bulls.

In fact, gold’s volatility this week is due in large part to Fed Chairman Jerome Powell who gave a very “dovish” speech on U.S. monetary policy Thursday morning.

Powell said the Fed will hold rates lower for longer to keep stimulating the coronavirus-battered economy, even if its previous inflation target of 2% is breached.

Powell said that after periods when inflation has been running below 2% — in recent years it has averaged 1.4% — monetary policy will likely aim to achieve inflation moderately above 2% for some time. And that sent gold on a roller coaster ride.

Boiling down what Chairman Powell said, the U.S. central bank isn’t going to try so hard to keep inflation suppressed. Instead, the Fed will aim to boost employment.

In fact, Powell and the Fed came out as so dovish that Joachim Klement, an investment strategist at U.K. brokerage Liberum Capital, wrote a note titled: “Low Rates Forever?” In it, Klement said that it’s likely the Fed won’t raise interest rates for at least the next five years.

And later, St. Louis Fed Chief James Bullard chimed in, saying “If you wanted to stay on the price-level path that was established from 1995 to 2012, you could run 2.5% inflation for quite a while.”

Why is this important? Because this will likely reignite “the inflation trade.” Rising inflation historically was bullish for hard assets. But in recent years, low inflation has actually dragged on prices of commodities — like gold.

Now, we aren’t seeing much inflation yet. On Friday, the Department of Commerce released its Core Personal Consumption Expenditures (PCE) Index. This is the benchmark the Fed watches. The PCE increased 0.3% in July. While that’s up from 0.2% in June, it is below the consensus forecast of an increase of 0.5%.

But just because we aren’t seeing inflation yet doesn’t mean it’s not coming.

And the market is sure acting like it is. The amount of gold in physical gold ETFs is soaring as investors start hedging against higher prices. The gold in the SPDR Gold Shares ETF (NYSE: GLD, Rated “B”), the biggest of the physical gold funds, just topped 3,383.56 metric tons (10,8783,980 troy ounces). That’s very close to an all-time high.

Now, it’s time to check in on an updated chart of gold, the one I originally showed you on Aug. 15:

This chart shows gold with Fibonacci retracements. Fibonacci was a medieval Italian mathematician who discovered ratios that recur in nature over and over. They’re useful in trading because “Fib” numbers show where support and resistance are likely to occur.

Even if you think Fib numbers are a bunch of hokum, plenty of other technical traders are watching them. And gold is clearly holding a level of Fibonacci support.

When I showed you this chart a couple weeks ago, I said we could see gold pull back for a while before taking off again. And that could still happen. But we also need to acknowledge that the recent uptrend — that green dotted line — is holding very well. So, gold could take off sooner than later.

Here’s what I’m doing — I’m making my shopping lists. I gave you examples of the kind of stocks I’m looking at in another recent column. I haven’t pulled the “Buy” trigger yet, and so far, I’ve been right.

That said, I’ll be buying soon enough.

What you should be doing is rolling up your sleeves and doing your research into what stocks you want to buy when the next rally comes. Sure, you could just buy the VanEck Vectors Gold Miners ETF (NYSE: GDX; Rated “B-”). But there is SO MUCH more potential in individual stocks.

The Fed is giving a clear warning: They won’t stop inflation when it next rears its head. Investors are already stocking up on gold. The next move could be BIG!

All the best,

Sean