Gold-price tracker GLD and other gold stocks surged on the Federal Reserve's dovish outlook on Wednesday, which has sent the 10-year Treasury yield falling below 4%. Gains continued early Thursday, but were somewhat muted after stronger-than-expected retail sales and jobless claims data. The SPDR Gold Shares ETF is in a buy zone, while Barrick Gold is near an early entry point.
Agnico-Eagle Mines and Wheaton Precious Metals are both near cup-with-handle buy points. Meanwhile, copper play Freeport-McMoRan just cleared an early entry.
Fed Outlook Jolts Gold Stocks
Gold stocks caught fire on Wednesday afternoon as Fed projections penciled in 75 basis points in rate cuts next year. But the biggest gains didn't come until Fed chair Jerome Powell painted a soothing picture of the outlook for inflation and interest rates.
"Inflation keeps coming down. The labor market keeps coming into balance. So far so good," Powell said.
Powell sounded upbeat about the economy, noting that growth has come down and the tight job market had eased without much of a rise in unemployment. Policymakers continue to see the unemployment rate rising modestly to 4.1% by the end of 2024. The Fed predicts real GDP will grow 1.3% in 2024.
"We're getting back to the point where both mandates are important," Powell said, referring to the Fed's 2% inflation and full employment mandates. He said the Fed is very cognizant of the risk of keeping policy tight for too long
Real 10-Year Treasury Yield Tumbles
Here's why Powell's message was music to the ears of gold investors:
Powell's recognition that risks are balanced means that the Fed will take care to keep growth — and inflation — from falling too much. That's why inflation expectations didn't really move much on Wednesday.
Rather, the plunge in the 10-year Treasury yield, which continued on Thursday, was virtually all due to lower real interest rates. That can be seen in the 10-year Treasury Inflation-Protected Securities, or TIPS, yield, which has tumbled 25 basis points to 1.77% since the Fed released its outlook on Wednesday.
Real interest rates are a big deal for gold investors because they represent the opportunity cost of holding gold. The other bit of good news is that the Fed kept its long-term estimate of the neutral interest rate at 2.5%. That implies a 0.5% real interest rate, given 2% inflation. If that's right — and Powell acknowledged that it might not be — real interest rates still have further to fall.
Fed Rate-Cut Odds Sink Dollar
As of Thursday morning, markets now see 89% odds that the first Fed rate cut will come at the March 20 meeting. Further, markets see 79% odds that the Fed will cut its key rate by 1.5 percentage points in 2024 — twice as much easing as Fed policymakers expect.
The upshot: It now looks like the Fed might begin easing before the European Central Bank does. That helps explain why the U.S. Dollar Index has fallen sharply vs. advanced-economy currencies, trading down to 102.36 early Thursday from nearly 104 just before the Fed news.
The weaker dollar raises the price of gold and other commodities in dollar terms.
Gold Price, Gold Stocks
The spot gold price has jumped from about $1,980 per ounce to $2,038 since the Fed news dropped.
GLD rallied 2.3% to 187.63 in Wednesday stock market action. That carried GLD back above a 186.36 buy point from a double-bottom base. In early Thursday action, GLD rose 0.8% to 189.06.
GOLD stock added 2.1% to 17.80 early Thursday, after jumping 6.7% on Wednesday. GOLD stock is trying to clear a 17.79 early entry point.
AEM rose 2.1% to 54.67 Thursday, following the prior day's 6.5% advance. AEM stock has a 54.70 cup-with-handle buy point.
Wheaton Precious Metals, which gets nearly one-third of revenue from silver and nearly two-thirds from gold, rose 1.8% to 49.29 on Thursday, adding to Wednesday's 4.4% gain. WPM stock has a 49.56 cup-with-handle buy point.
Other commodities stocks also are rising post-Fed, helped by firmer economic growth prospects and a softer dollar. FCX jumped 5.7% to 41.44 Thursday, eclipsing a 39.46 early entry. That followed a 4.7% gain the prior day.
Diversified miner Rio Tinto rose 2.55% to 72.26 Thursday morning, clearing a 71.51 early entry. RIO Stock climbed 1.5% on Wednesday.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
