Prices of gold are reaching new highs after the US Federal Open Market Committee (FOMC) cut the federal funds rate by 50 basis points. The price of a troy ounce of gold is currently being quoted at around 728 USD while it was 714 USD just before the Fed’s announcement. Thursday morning prices of gold jumped even to 730 USD per troy ounce.
The reason for the strengthening of gold is the situation on the American dollar market, which is negatively correlated with gold. The yellow metal started its path to the top already before the Fed’s publication regarding interest rates in the US. The 50 basis points interest rate cut surprised both, the market and analysts, who expected only a 25 basis points decrease. A massive sell-out of the dollar started, which culmination was today when it broke the 1.40 level against the euro for the first time in history. The EURUSD rallied Thursday morning all the way to 1.4062, which a new all-time high. In the situation when the dollar weakens, gold becomes more attractive to investors as an alternative investment.
Gold has become more attractive to investors also after the publication of the new forecasts for gold prices by the second-largest Swiss bank, Credit Suisse. According to the bank, the price of a troy ounce of gold will cost between 730 -770 USD in the next 12 months. In the last forecast prices of gold were expected to remain in the 670 – 720 USD range. The argument for a higher forecast was the weakening of the American dollar as well as the worldwide declining supply of the yellow metal.
At 730 USD gold encountered a strong resistance level – the high from May of 2006. At this level the next moves of gold prices will be decided. Breaking the resistance level will open the door for the historic all-time high at 850 USD from 1980. Taking into account the weak greenback, this scenario is possible in the long-term. Rebounding downwards from the 730 USD resistance level will cause another fight between bulls and bears at the 720 USD support level.
Adam Narczewski
X-Trade Brokers Dom Maklerski S.A.
adam.narczewski@xtb.pl