Gold’s $1,700-$2,000 Cage Is More Likely a Rally Foundation
(Bloomberg Intelligence) — The limited production of gold vs. unlimited supply of fiat currency is a top reason the metal appreciates over time and the extended consolidation between $1,700-$2,000 an ounce appears as base building. We see the metal more likely to breach the upper end of the range than sustain below. (08/04/22)
1. Gold Above $2,000 May Be a Matter of Time
Gold appears more likely to resume its enduring upward trajectory and breach resistance at around $2,000 an ounce vs. sustaining below $1,700 support. Guidance may come from the metal denominated in the euro, which reached a new high in March. Typically, it’s a matter of time in dollarbased gold to follow new highs in other major currencies. Our graphic shows the metal consolidating within a tight cage and a base forming around the first stop on the way up in 1Q20 at about $1,700. The most aggressive Fed tightening in 2022 since the 1980s has contained gold and it’s a matter of time before rate hikes subside, letting the metal resume its path of least resistance upward.
It’s a question of what forces might pressure gold below $1,700 in 2H vs. its normal tendency to advance. Our bias tilts toward the latter. (
About $1,700 Gold Appears as New $1,200
Gold may be in a similar condition in 1H as 4Q18, when the metal advanced from base building of around $1,200 an ounce. A similar foundation appears to be forming at about $1,700. The key catalyst four years ago for gold to rally was when Fed rate-hike expectations reversed. We see parallels in August, with the central bank entering a “meeting-by-meeting” basis. Our graphic shows the rolling fed funds future in one year (FF13) potentially bottoming in a similar pattern as in 2018.
The peak rate implied by FF13 came in June at about 4%, a few weeks before the gold trough of around $1,700. In the unlikely scenario that fed funds sustain above 4%, gold will come under pressure. Our bias is toward the metal breaching $2,000 resistance as Fed funds expectations stabilize, and potentially decline.
