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In a surprising twist from earlier hawkishness, the Federal Reserve just announced a more accommodating tone. Citing several economic headwinds, Fed Chair Jerome Powell stated that tightening the money supply was unnecessary. Naturally, this announcement had a big impact on gold prices.

As you know, precious metals feed off fear and uncertainty. But one of the strongest correlations exist between dollar supply and gold prices. Based purely on Economics 101, if the Fed turns hawkish, bullion valuations decline: fewer dollars chase after goods and services.

But the opposite is also true. If the Fed suddenly lets the printing presses loose, more dollars will compete for available commodities. Since precious metals are by their very nature limited in quantities, gold prices typically have nowhere to go but up.

This is where we must cool the conspiratorial urges. While the Fed’s tone is dovish, they haven’t aggressively actualized their newfound sentiment. Instead, they are flying about in a holding pattern: if the need for financial engineering materializes, the central banks stands at the ready. Of course, if that need doesn’t become apparent, Powell could resume his prior hawkish intentions.

Logically, this puts gold prices in limbo. On one hand, an accommodating Fed is far better for bullion than a stingy administration. But on the other hand, we’ve seen how the fundamentals sometimes don’t align with the technicals.

What’s a gold bug supposed to do?

 

Gold Prices Likely to Move Higher No Matter What

Gold is one of the more convincing stories over the past few months. Since the start of January, gold prices have increased over 2%. Over the past 90 days, the yellow metal gained over 7%. Contrast this with Brent Crude Oil, which has lost 19% over the trailing-three months.

Both gold and oil are essential commodities, and both are relatively rare. Yet only the precious metals have jumped on the favorable supply-demand picture, as well as the positive fundamentals. That tells me that a substantive catalyst is driving the metals higher.

What could that be? Perhaps, the markets have increasingly acknowledged the greenback’s worrying instability and misalignment. For instance, the Fed began earnestly discussing potential rate hikes back in October. Naturally, these statements lifted the dollar, but those gains eventually fell apart throughout December and most of January.

In other words, I don’t think it really matters what Powell or the rest of the central bankers say. From a speculative point-of-view, I believe the Fed wanted to see how much they could talk up the economy. When that approach failed, they decided to adopt their now hands-free policy.

I’m not sure where that leaves us. What I do know is that gold prices are loving this conflicted narrative.