Despite the strong likelihood of another Federal Reserve interest rate increase later this month, gold has seen a rebound of nearly $70 per ounce in recent weeks. This has been buoyed by mild inflation data and early indications of softness in the U.S. labor market, such as a noticeable rise in weekly jobless claims and the first lower-than-expected figures on monthly non-farm payrolls since early 2022. If we take the market’s pricing, which implies a ~95% probability of the Fed raising the Fed Funds Rate (FFR) to 5.50% at their meeting on July 26th, at face value, then we are facing a situation in which monetary policy conditions are the most restrictive they have been in at least twenty years.
Furthermore, the 2s10s Treasury Yield Spread has been inverted for more than one year and in recent weeks it made a fresh 52-week low at a 108bps inversion:
2s10s Treasury Yield Curve
The steep inversion is sending a multi-faceted message to investors:
- The Fed isn’t cutting rates anytime soon.
- The Fed seems set on forcing at least a mild recession in order to finally kill any last remnants of inflation.
- Until the labor market shows some real cracks the Fed isn’t likely to begin an easing cycle.
- The market doesn’t believe the Fed can hold such a restrictive monetary policy stance for very long (first rate cut in Q1 2024, if not sooner).
Considering the amount of tightening global central banks have carried out in the last couple of years, it is impressive that gold has reached new all-time highs in multiple currencies this year (euro, pound sterling, yen, etc.) and remains within 6% of an all-time high in US dollar terms.
Based on last week’s pronounced weakness in the US Dollar Index and gold’s relative buoyancy, it seems to me that gold is trading well due to an impending US fiscal trainwreck and a significant Fed easing cycle that is to come, whether it begins in six months or nine months. The dollar will gradually lose share as the global reserve currency, and gold remains the only timeless, true store of value that has been used by cultures around the world for thousands of years.
Now let’s have a look at gold in US dollar terms on multiple time frames:
Gold (Daily)
The rally from the June low at ~$1900 has reached an important area of confluence of resistance between $1970 and $1980, an area that roughly lines up with resistance from early February. It is common for rebound rallies to see a consolidation/pullback on the first test of the 38.2 Fibonacci retracement level, especially when that coincides with a falling 50-day moving average.
Gold (Daily – One Year)
Fibonacci levels have worked well for gold as evidenced by the support found at the 38.2 Fib retracement of the entire October 2022/May 2023 rally.
Gold (Weekly)
The weekly chart shows potential bottoming candles just above major long-term support at $1900, followed by last week’s large full bodied bullish candlestick. I also find it notable that price found a bottom as the weekly-RSI(14) tapped the median line from above.
Gold (Monthly)
A couple months ago I discussed the “triple-top” in gold and pointed out that we would need a lot more evidence in order to declare this to be a bearish pattern. Since May’s potentially bearish ‘spinning top’ monthly candlestick was printed, gold has had a relatively normal correction on pedestrian trading volume. It will be important to see if July continues to shape up as a green month for gold; a monthly close above $2,000 would be decidedly bullish , whereas a close below $1900 would increase the odds that the May peak at $2,085 was indeed an important bearish inflection point.
So far, the price and volume action is not making the triple-top interpretation look valid. If anything, this may prove to be a bullish continuation pattern with a breakout > $2,085 later this year. Moreover, the fact that gold continues to spend a great deal of time above the 2011 high bodes well. Bearish markets don’t consolidate near all-time highs for extended periods of time.
The technical picture for gold is quite positive, and remains in stark contrast to pervasive negative sentiment on the yellow metal. Even after its recent rebound, the Daily Sentiment Index for gold remains at a modest 38 reading. Meanwhile, there continues to be a belief among many investors that gold is not a good hedge and that gold has performed poorly in recent years. The reality couldn’t be much further from this conventional wisdom; in the last twenty years gold has far outpaced inflation and in other global currencies such as the yen, gold has more doubled in the last five years.
Gold in Japanese Yen (Weekly – 10 Year)
That’s a pretty good performance, I must say.
While the bear case for gold involves some combination of a soft/no landing scenario for the US economy and the US dollar continuing to reign as the global reserve currency. The bull case for gold involves the continuation of already well established trends including rising government debt, global currency depreciation, and a steady reduction in the US dollar’s role as the global reserve currency used in the settlement of the majority of international trade.
I am comfortable continuing to be bullish on the US economic engine while trusting that all global fiat currencies will continue their long-term trajectory towards zero, and that politicians will continue to kick the debt can for as long as humanly possible.
Gold has a bright future.
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