The Bad News Isn’t Bad Enough for the Fed to Take Further Action

By Barani Krishnan

The economic news seems to be growing more concerning with each passing day.

However, for those who are bearish on gold, the Federal Reserve appears relatively unfazed. The central bank is likely to implement a half-point interest rate hike in June, avoiding a more drastic three-quarter point increase that could have significantly impacted the gold market.

As a result, the U.S. dollar index has retreated from its 20-year highs above 105 earlier this month, now resting just above 101, reflecting a decline of over 3%. Additionally, bond yields, as measured by the Treasury, have experienced a sharp decline, falling nearly 3.7% on Tuesday alone and aiming for a third consecutive week of losses. This creates a favorable environment for gold bulls.

At Tuesday’s close, gold futures on the New York exchange settled at $1,865.40 per ounce, rising by $17.60, or nearly 1% for the day. Earlier, gold futures peaked at $1,868.80, marking their highest value in two weeks. Notably, June gold has remained in positive territory for four straight sessions, its longest winning streak since early April.

Gold’s current momentum could potentially bring it back to the $1,900 mark, even if temporarily, according to Sunil Kumar Dixit, chief technical strategist. The weekly and daily technical indicators suggest an upward movement targeting the 50-Day Exponential Moving Average of $1,884 and the 100-Day Simple Moving Average of $1,886, along with the weekly middle Bollinger Band of $1,890. Dixit mentioned that should the upward trend continue, it may stretch to $1,900 and $1,910, where upward momentum might begin to wane. In the case of a correction, the 200-Day Simple Moving Average of $1,839 could provide solid support.

Ed Moya, an analyst from an online trading platform, echoed similar sentiments. He noted that gold, as a non-interest bearing asset, is becoming a sought-after safe haven, poised for a significant breakout if it can reclaim the $1,885 level. With a peak in Treasury yields already established and a potential pullback in the dollar as the European Central Bank prepares to raise rates, conditions appear favorable for the euro and, in turn, for gold.

Moya indicated that gold is likely to be well-supported by ongoing inflation concerns, uncertainties surrounding China’s COVID situation, and the cautious outlook from corporate America. He further commented that gold is experiencing a rally amid growing trepidations on Wall Street, suggesting that while the U.S. economy is not collapsing, the level of weakness is more significant than anticipated.

A key indicator of this growing concern is the decline in monthly sales of newly-built homes in the United States, which reached a two-year low in April. This data, released by the Commerce Department, underscores a slowing housing market amid rising interest and mortgage rates.

This drop in new-home sales follows previous reports showing a continued decrease in existing home sales for three consecutive months, attributable to climbing interest and mortgage rates. Additionally, the National Association of Home Builders reported that sentiment regarding home building sank to two-year lows in early May.

Housing and real estate play crucial roles in the U.S. economy, with approximately 65% of housing units being owner-occupied, contributing significantly to household wealth and providing substantial employment through home construction. The 2008/09 financial crisis serves as a reminder of how a housing market crash can trigger broader economic turmoil.