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The financial markets have been on a wild mountain-and-valley road trip for the past 48 hours. Yesterday, the Fed announced that it has cut the Fed Fund's interest rate by ¼%. This put strong and dramatic pressure on gold prices when the most active futures deal in December fell to a low $ 1412.10. This also sent US stocks lower yesterday as Dow traded down 466 points at a low before recovering somewhat. As we have noted recently, both stocks and gold, pending a reduction in the Fed, had moved together.
Typically, a strong stock market creates a risky market sentiment that causes market participants to move some of their investment from an active safe harbor class to equities. Conversely, when stocks are under pressure, many market participants move money from stocks to a safe harbor asset such as gold or the US dollar.
One exception to this rule is when the Federal Reserve raises or cuts interest rates. Fed rate cuts are seen as extremely bullish for both asset classes. Recently, in anticipation of the Fed action, which resulted in interest rates having dramatically increased both stocks and gold prices.
The inverse correlation between gold and stocks returned today as market participants responded to a series of tweets sent out by President Trump. Today, he announced the plan to set a 10% tariff on the remaining $ 300 billion goods and products coming from China to the United States as of September 1. This announcement created strong sales pressure in US equities and a strong bullish market sentiment in gold prices. This disconnected from the tandem feature, signaling a return to the negative correlation most commonly seen in these two asset classes.
Starting at At 22.15, EDT gold futures traded for $ 18.40 with the most active futures contract set at $ 1456, a gain of 1.3%. Not only is today's closing price the highest value in gold this year, it is also the first time gold has reached this price point since 2013. A near well above resistance that occurred at around $ 1440, the most recent high in gold.
U.S. stocks continued to move lower the second day in a row, with the Dow Jones Industrial Average dropping 280.85 points and currently standing at 26,583.42.
Our upside target for gold is still $ 1480. This is based on a 0.618% Fibonacci extension of the big rally that began in late May, to the end of June when gold pricing found resistance at $ 1442 per ounce. The previous $ 1442 resistance should now be supported by gold prices.
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