Gold Rebounds Sharply On Fed Rate Cut
Gold caught a solid bid in U.S. trading on Tuesday when the Fed announced an emergency 50 bps rate cut. The yellow metal has now retraced all of last Friday's losses and then some.
More importantly perhaps, the central bank has expended half its rate-cutting ammunition already. The Fed funds rate reached a high of 2.5% in December of 2018. Since then, the Fed executed three 25 bps rate cuts in 2019 and with today's 50 bps cut, the Fed funds rate now stands at 1.25%.
“The virus and measures being taken to contain it will weigh on economic activity here and abroad for some time.” – Fed Chairman Jerome Powell
In reality, the Fed has plenty of ammo if it's prepared to go negative. Given the precedent set by other major central banks since the financial crisis, I'd say it's unlikely that the Fed will respect the zero bound in the event of a recession.
The stock market certainly didn't find any solace in the Fed announcement, with the DJIA dropping more than 700 points. It seems like investors felt the Fed's aggressive action warranted a greater level of concern on their part.
The 10-year Treasury yield fell below 1.0% for the first time ever on Tuesday. With inflation running north of 2%, real interest rates are going deeper into negative territory.
This is an environment where gold should thrive. The yellow metal not only retraced all of Friday's losses, but more than 61.8% of the entire decline off of last week's high at 1689.35 has now been recovered as well.
This rebound suggests the dominant uptrend is gold is still very much alive, but I would expect short-term conditions to remain choppy as the coronavirus crisis continues to play out.
Silver, platinum, and palladium remained comparatively weak due to their more industrial nature. I'd like to see a close in silver back above 17.54 (100-day SMA) to feel a little more confident about a low being in place.
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