Fed rate hikes push gold into bullish territory

THE Fed has done it again, lifting gold price on the day of the rate hike.

On March 21, the Fed decided to raise the Fed Funds Rate (FFR) to 1.75 per cent from 1.50 per cent. Instead of seeing a rally in the US dollar and a sell-off in gold, the opposite happened where gold bottomed out again on the rate hike day.

Part of the reason for that was due to the pricing-in mechanism of the market. Prior to the Fed rate hike, gold has been stuck in a slumber since Feb 16 as it retreated off the US$1,360 high and stayed range bound around the US$1,300 psychological round number.

Another reason for the bottoming price action in gold was because the most recent March Fed median dot-plot projection for the Fed Funds Rate at the end of 2018 remained the same as the December 2017 projection at 2.25 per cent.

The March rate hike can be treated as a dovish hike as the market was expecting some new language of a possibility of four rate hikes this year to no avail.

Since the start of this current rate hike cycle back in December 2015, the market has experienced five rate hikes. All those hikes succeeded in forming a bottom on the day of the rate rise or one day later except for the rate increase in June 2017.

On average, gold rallied 14 per cent after the bottoming signal appeared on the day of the Fed rate hike. We mentioned a possibility of a bottom in gold as well in the Dec 11, 2017 chartpoint publication that played out perfectly.

After the Fed hiked 0.25 per cent on Dec 13, 2017, gold bottomed out immediately off the US$1,240 low and appreciated 8 per cent to a high of US$1,360 over the following two months.

Hence, we might be seeing an exact replay of a bottoming price action in gold now after the Fed hiked the FFR on March 21. Using the average rebound of 14 per cent after the Fed hiked the FFR, the target for this current leg higher for Gold would be US$1,500.

Price action wise, gold looks ready to launch higher too. After moving into a correction mode since Jan 25 where it hit a high of US$1,365, Gold bottom bounced around the US$1,300 psychological round number and the 50 per cent Fibonacci retracement level.

To be exact, the US$1,306 resistance turned support area that managed to hold gold up on three occasions, shown by the highlighted boxes, confirms that gold is forming a new base off the US$1,300 psychological area.

Moreover, after the FOMC day on March 21, the bulls formed a bullish engulfing bar that broke above the pullback line and it suggests the start of the next leg higher.

Keep in mind there is a longer-term bullish formation that is working in the background.

Since June 2013, gold has been developing an inverted Head and Shoulders pattern and the key level to trigger the bullish formation pattern is when gold closes above the US$1,360 neckline on a monthly basis.

Hence, it will be interesting to see how gold closes for the next few months as that will dictate if we see a greater move higher from a longer-term perspective. For the inverted Head and Shoulders pattern, the target for Gold is US$1,700.

All in all, gold looks bullish on the Fed rate hike cycle, from the near-term and long-term price action perspective.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.