'Shock-and-awe' Fed rate cut bullish for gold

New York (Mar 3)  Gold futures soared Tuesday after the Federal Reserve announced a 50-basis-point rate cut in an attempt to head off economic damage from the coronavirus outbreak, and analysts say they see still more upside potential for the yellow metal.

“We caught a big bid off of the surprise interest-rate cut,” said Charlie Nedoss, senior market strategist with LaSalle Futures Group. “You’re seeing them [policymakers] do the shock-and-awe thing.”

The Fed basically overwhelmed markets with a dramatic move when it was not necessarily expected. Financial markets had previously factored in more loosening of monetary policy from the Federal Reserve, but most were not expecting it as early as Tuesday, Nedoss explained.

After the rate cut came out around mid-morning, Comex April gold futures were up $48.80 to $1,643.60 an ounce as of 10:45 a.m. EDT.

Policy-makers released a statement saying the fundamentals of the U.S. economy remain strong, but the coronavirus “poses evolving risks to economic activity.” Thus, they lowered the target range for the Federal funds rate by one-half percentage point.

There was initial disappointment when an early-morning meeting of Group of Seven officials appeared to result in no outright actions, said George Gero, managing director with RBC Wealth Management.

“But the Fed rate cut is a help,” Gero said.

The Fed move cleared the decks of any uncertainty, said Phil Flynn, senior market analyst with at Price Futures Group.

“On one hand, there is no doubt that the Fed’s aggressive reaction of cutting rates by 50 basis points is very bullish for gold,” Flynn said. “Having said that, gold has been pretty strong. Because there was an expectation built in that central banks would take some action, we could pull back a little bit.

“But ultimately, what we have found in the past is that lower interest rates by the Fed and other central banks should be supportive for the gold market. Even though we’re seeing some volatility right now, we think ultimately it [the Fed action] will be bullish for gold, although the market may pull back here at some point.”

Flynn said he has learned “you don’t want to fight the Fed” during his many years in the futures business.

“The Fed demonstrated very clearly that they are going to do whatever it takes to keep the [stock] market under control. So we’re going to be looking to buy the breaks.”

A key for gold, Nedoss said, will be whether the gold market can remain above the 10-day moving average in the April futures, which was around $1,627.20 an ounce as of when he spoke. He put the next big chart level around $1,650.

“I’m looking for follow-through in the longer term,” Nedoss added.

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