In today's Metals Edge, I wanted to highlight one of the key pieces every Precious Metal's Trader should read and can lay the groundwork for the next probable direction leading into the May 3rd Fed Meeting and after. Bill Baruch, President of Blue Line Futures, put this piece out Monday, April 17th. I, Phillip Streible, Chief Market Strategist at Blue Line Futures, overlayed the key charts I am watching. 

Here is a look back at the 2019 Bull Market in Gold and how the current setup could result in a similar move higher. 

Fundamentals: The Federal Reserve’s May 3rd policy decision is quickly approaching. Last week, a deluge of hard inflation data showed cooling prices and even pockets of disinflation via CPI and PPI, but Fed committee members and Fed Funds futures aligned to exude “more work to do”.

Last week’s hard data revealed Headline CPI Less Shelter dropping to 3.44% in March, down from 4.96% in February. This is a win. Furthermore, the Fed has referred to the Services sector as remaining stubbornly high, and it actually showed signs of disinflation Less Shelter at -0.3% m/m. Even Shelter itself could be viewed as a bright spot, although +0.56% m/m is high, it is below the 3-month (+0.68%), and 6-month (+0.70%) trend. As for PPI, Headline surprised to the downside with a disinflationary -0.5% m/m, versus +0.1% expected with y/y falling to 2.7%, the lowest since January 2021. Lastly, the Import Price Index went under the radar on Friday at -0.6% m/m for March, after -0.2% for February, and -0.4% for January. Prices are falling, and specifically those that producers are paying. Remember, producer prices are a leading indicator of consumer prices.

Daily Gold Chart

Coupled with the tight labor market, Waller and other Fed committee members are also focusing on broad strength throughout the economy. As of Thursday, the Atlanta Fed GDPNow model has Q1 GDP rising to 2.5%, a steady elevation over the last two weeks. Industrial Production has also shown resilience, confirmed by a rebound in NY Empire State Manufacturing this morning. The same goes for Retail Sales; although it disappointed on Friday, the three-month trend due to January’s strength cannot go unnoticed.

So where does this leave us? The CME’s FedWatch Tool shows the probability of a 25bps rate hike at the Fed’s May 3rd meeting rising to 86.7% today, from 78% Friday morning, and from 72.2% one week ago. On Friday, the U.S. Dollar Index rejected a test of the February 2nd low, and 10-year Note yields have been rising for the last week and a half. For what it’s worth, our CTA Blue Creek Capital Management went short the Euro on Friday, email us at info@bluelinefutures.com to discuss. The market is telling us something, pricing in one more hike from the Fed, and this a complete parallel to 2018. What is another 25bps? The token hike from 4.75% to 5.00% does not really change anything, but it is just that, a symbolic move by the Federal Reserve showing how serious they are in the bank’s fight against inflation.

At the Fed’s last hike in the 2018 cycle on December 20th, when the S&P was -17% mind you, the bank said it planned to hike two more times in 2019. That never happened. Instead, they cut three times that year, with the first coming in July. Although we currently do not find ourselves in the fear-mongering recession camp, how could you with this data, again look at the chart book, we cannot ignore the fact things will slow. However, between now and then, the Fed cannot allude to any holes in its steadfast mission, and like in 2019 they will squeeze in that one last hike. The opportunity between now and then has begun lifting the U.S. Dollar and rates for what could be a “buy the rumor, sell the news” event, and that is how we plan on playing it.