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U.S. Money Reserve on Why the Price of Gold May Rise in 2019

U.S. Money Reserve on why Gold May Rise

U.S. Money Reserve is one of the top distributors of government issued gold coins, bullion, and bars. Despite the precious metal’s struggles over the past five years, gold is an asset buyers may want to consider purchasing in 2019. The price of gold has stagnated since 2013, rising just five percent, but a recent increase in volatility in the equity market has given the metal a new lease on life. Over the past month alone, the price of gold has increased by about three percent, while the S&P 500, a broad measure for the performance of U.S. equity prices, has declined by roughly 20 percent.

It may be more than fear that sends gold prices higher in 2019. A shift in monetary policy by the U.S. Federal Reserve may result in falling interest rates, weakening the U.S. dollar and providing that added spark to send the price of gold even higher throughout the year. Since gold is priced in U.S. dollars, as the currency weakens, it takes more dollars to purchase the same unit of gold. Individuals who are looking to gain exposure to gold and broaden their portfolios could do so through the individual retirement accounts offered by U.S. Money Reserve.

Gold vs. the Dollar

In 2002, the U.S. Dollar Index, an index that measures the performance of the dollar versus a basket of currencies (a benchmark for regional currency movements), peaked at a level of approximately 121. This increase was followed by a decade-long decline, with the index falling nearly 41 percent, to a level of roughly 72. U.S. Money Reserve notes that, during that same time, the price of gold rose nearly six-fold, to approximately $1,800 per ounce from about $300 per ounce.

U.S. Money Reserve chart 1

Shifting Stance on Monetary Policy for 2019

This year, the dollar is facing a similar downtrend as the Federal Reserve signals a potential slowing of future interest rate hikes. During his latest press conference following a Federal Open Market Committee meeting on December 13, Federal Reserve Board Chairman Jerome Powell noted that the committee now predicts two interest rate hikes in 2019, which is down from the previous expectation of three rate hikes. The Fed’s shifting stance on monetary policy may come as a result of disinflation (slowing inflation rates) and weaker-than-forecasted economic growth.

Flattening Yield Curve

The outlook for lower interest rates has already had an impact on the U.S. Treasury yield curve, which has flattened throughout the past few months to its lowest levels in nearly a decade. The steepness of the yield curve is typically measured by taking the spread or difference between the 10-year U.S. Treasury Note and the 2-year U.S. Treasury Note. When the spread is contracting toward zero, it is known as flattening; when the spread is rising or moving positively away from zero, it is known as steepening. Since the beginning of October, the 10-year Treasury rate has fallen roughly 50 basis points, to 2.75 percent from 3.25 percent. Additionally, the yield on the 2-year Treasury Note has declined 30 basis points, from roughly 2.9 percent to 2.6 percent, since the beginning of November.

Should the Fed continue to reduce its outlook for interest rate hikes in 2019, the yield curve is likely to flatten further. The spread for the 10-year and 2-year Treasury Notes is about 15 basis points, its lowest level in nearly a decade.

The reason this is occurring is that the Fed is raising short-term interest rates, lifting yields on the front end of the curve. Meanwhile, the market is taking the view that inflation will remain tame in the future, keeping long-term interest low. Additionally, global low interest rates because of negative interest rate policies—also known as NIRP—in the Eurozone and Japan make U.S. Treasuries very attractive to individuals seeking yield. The policy is also helping to suppress yields on the long end of the curve.

Market Betting on No Rate Hikes

According to data from the CME Group, traders’ betting suggests that there is a now a 50-percent chance that there will be no future interest rate hikes through January 2020. Surprisingly, the probability for no additional interest rate hikes over the next year has increased from just 25 percent one month ago.

(CME Group)

Lower Inflation Rates

Over the last few months, a few developments have led individuals to bet that the Fed will reverse its position or potentially change its stance on monetary policy. Inflation rates that have failed to materialize over the past few years are driving this shift in outlook. One key measure of inflation is the trimmed mean inflation rate for personal consumption expenditures—the inflation reading that the Fed uses—which was tracking at 1.97 percent in November.

Other measures of inflation have also remained weak, such as the Consumer Price Index (CPI) and Producer Price Index (PPI). The fact that those indices have been trending higher in recent years suggests accelerating inflation rates, but now those same indices are falling, suggesting lower inflation rates. One reason for the falling inflation rates is that the dollar has strengthened materially over the past few years. The strengthened dollar kills off inflation by depressing commodity prices on products such as gold and oil. Should the dollar weaken, it is likely to stoke inflationary force and provide a tailwind for commodities and metals such as gold.

Additionally, signs are emerging that the economy may slow in 2019 as trade tensions between the U.S. and China continue to escalate. The Atlanta Federal Reserve’s GDPNow is currently projecting fourth-quarter U.S. GDP growth of 2.7 percent, which is lower than the third-quarter GDP growth of 3.4 percent.

Dollar Weakness

Should the Fed put a hold on raising interest rates, as the financial markets project, it is likely to cause the dollar to weaken in comparison to other major currencies such as the euro. That is because the European Central Bank (ECB) has just concluded its quantitative easing program. Quantitative easing (QE) is a tool that central banks use to help depress interest rates to stimulate the economy. In this case, the ECB was buying sovereign bonds from countries in the Eurozone to reduce interest rates across the yield curve. With QE concluding, it may result in yields rising across the Eurozone from very depressed levels. For example, the German Bund 10-YR currently trades with a yield of 25 basis points. Should interest rates in Europe begin creeping up, it is likely to lead to the euro strengthening.

Bearish Outlook for the Dollar

An exploration of the dollar using technical analysis suggests that it may fall soon. The U.S. Dollar Index is flashing a bearish technical reversal pattern known as a rising wedge. Should the dollar weaken, as the pattern suggests, the index could decline to the lows seen in early 2018; this would be a decrease to a level of around 88 on the Dollar Index from its current level of around 97.

Such a decline may be part of a much longer-term trend currently taking hold in the Dollar Index, which started in 2017 when it peaked around a level of 102. Should the Dollar Index drop below a level of technical support, which has held firm in the past at 88, it could fall to its next support level at 79.

The dollar is seeing the same technical warning signs as the euro. However, in this case, the euro is flashing a bullish reversal pattern known as a falling wedge, and a breakout of the euro could cause the currency to strengthen to around 1.20 compared to the dollar.

Should the dollar weaken, as the technical charts indicate, it is likely that commodities and assets associated with this class will rise. One such beneficiary may be gold, and the technical charts also point to the price of gold potentially rising in the future.

Why Gold Could Rise

Gold prices have been steadily trending higher since 2006, and now the metal is nearing a potential breakout should it rise above technical resistance at $1,350 per ounce. A resistance level is an area on the chart that has seen sellers enter the marketplace in the past. In this case, the price of gold has meaningfully struggled to rise above $1,350 since October 2013.

However, U.S. Money Reserve notes that if gold can successfully rise above $1,350 an ounce, it is likely to signal a rise to about $1,550 an ounce. That is where the next level of technical resistance sits and may prove to be a problem for gold to rise beyond. Should the price of gold rise above the price of $1,550 an ounce, it could go on to rise back to previous highs last seen in 2011.

Gold vs. Equity Prices

Using the S&P 500 Index as a proxy for the equity market, one would find that the ratio of gold to the S&P 500 is trading at nearly its lowest level in years. This suggests to U.S. Money Reserve that gold may be inexpensive when compared to the broader market value of stocks.

Many Risks

U.S. Money Reserve notes that there are many hurdles to clear before gold prices can rise in 2019. Nearly all the factors mentioned above would need to line up perfectly for the price of gold to rise substantially. Should the Fed stay resolute on its path to normalize monetary policy, the dollar is likely to continue its path of strengthening. That could create more disinflationary forces in the economy and likely send commodities prices and gold sharply lower in the future. The technical chart suggests that gold prices may fall if they do not rise above technical resistance at $1,350 an ounce. Should that happen, a technical reversal pattern called a triple top will have formed, and that would suggest that the price will fall potentially as far as its recent lows of nearly $1,000 an ounce.

With gold prices in steep decline over the past few years as the dollar has strengthened, U.S. Money Reserve believes that the winds may be shifting for the precious metal in 2019. While nothing is certain, should U.S. monetary policy shift and a weaker dollar emerge, the market value of the metal could potentially get a badly needed break and start to rise. If that happens, gold may be poised for a steady increase in 2019 and perhaps beyond.


Read our previous about U.S. Money Reserve: https://www.dailyforexreport.com/u-s-money-reserve-releases-reagan-platinum-coin/