I usually save the rationale of a trade idea for the bottom of my writing, but today I decided to start with the "Bottom Line"...
"Gold is set for yet another breakout as the Fed’s interest rate policy and economic uncertainties are fueling its bullish trend like we haven’t seen in decades.
Investors should expect a breakout move in the U.S. Gold Fund to lead to another 15-20% rally higher.
Here’s how I position for the long-term move"… (See Below)
This morning’s jobs report gave investor’s a Goldilocks result.
If you missed it, the payroll numbers came in slightly lower than they were expected at 142,000. The economists forecasted 161,000. The number was much better than the 89,000 reported at the beginning of August.
That August number was an ice bucket challenge for investors as it was the first sign that the economy may be running towards a recession.
Of course, that just means that the Fed will lower rates and everything will be fine, right?
Maybe.
We do know that the Fed will be lowering rates in just under two weeks. As of today, the market is starting to ratchet their expectations higher. They want a 0.50% cut, not 0.25%.
Here’s what I can tell you. The Fed’s not going to cut interest rates by 0.50% on September 18. The market may want that, but the Fed’s not going to give it. They’re on a “measured pace”, remember?
Here’s the good news though.
It doesn’t matter whether it’s a 0.25% or 0.50% cut to rates, I can tell you that rates will be lower my more than a full 2% in 2025.
That may not bode well for the market, but there is one asset that will benefit.
Year-to-date, there’s only one industry in the market that has outperformed Gold, the insurance sector (KIE).
The Nasdaq 100 (QQQ), Technology sector (XLK), and semiconductor sector (SMH) have all trailed behind Gold and other interest rate sensitive investments in terms of 2024 performance.
But Gold’s run is getting ready to take off again.
Lower interest rates are going to eat into the strength of the U.S. Dollar. The relationship with gold as a hedge against a weaker Dollar should start to kick into high gear in October or November.
Add to that the very real potential that we’re going to see some sort of uncertainty around the election results in November, and you’ve got multiple catalysts for higher gold prices.
In-the-know investors and traders have been preparing for another breakout in Gold for the last three months.
Volume on the US Gold Fund (GLD) has been on the rise as more money moves into the trade.
Call option activity has been on the rise too. That tells you that the options market is speculating on the bullish trend in gold continuing.
The next catalyst is going to be the September 18 interest rate meeting.
A 25 Bps drop of interest rates will start a slow and steady rally higher.
A 50 Bps drop will cause a spike in gold that will accelerate higher as investors start to truly worry about the economy.
The last two times that the Fed lowered rates by 3% or more resulted in negative returns for the S&P 500. At the same time, those periods saw the U.S. Gold Fund appreciate 71% and 95%.
These returns were calculated using the start of the interest rate lowering cycle, meaning that the current year-to-date return for the GLD shares is about to start an even larger ascent.
Gold’s chart draws a clear line at the $235 level as the “line to cross” to start the next stage of this gold rally.
The price action is likely to be just like that which we saw at the beginning of the year when GLD shares broke above $190. From there, gold started a rally that ran 18% higher over the following 35 trading days.
The current rally setup is ready to drive GLD prices through $250 to a $275 target price over the next 3-6 months.
As always, make sure that you have the education and experience in trading options before purchasing an option for your portfolio.
