“The ballooning Fed balance sheet is a party for gold,” says George Davis, Chief Technical Strategist at RBC Capital Markets.
Davis says there is evidence of a completed bottom formation in the Bloomberg Commodity Index, with the RSI also confirming the bullish breakout (Chart 1). He also thinks that the bullish move in commodities has successfully stalled the decline in the commodity currencies: AUD, CAD and ZAR. However, stronger commodities tend to have bearish implications for the USD, especially now the inverse correlation between the US Dollar Index (DXY) and the Bloomberg Commodity Index has reasserted itself (Chart 2).
Overall, bullish gold remains Davis’s strongest conviction call (his 1 to 3 month target is 1800), driven by the ballooning Fed balance sheet (Chart 3), falling yields, higher debt levels and the debasement of currencies.