Anthony Bradshaw
The Gold Breakout
The price of gold started a major move higher on March 1st, spiking to a new all-time high near the $2500/level on May 20.
However, the uptrend was decisively broken after the strong May labor report on May 7, when interest rates spiked and gold fell by almost 4%, breaking the 50-day moving average support line.
Is the gold breakout trade finished for now, or can gold regain its luster and continue the uptrend?
Barchart
What was behind the breakout?
One way to trade gold is simply using technical analysis. Based on the daily chart, the uptrend is broken, and it seems like there is a head and shoulders pattern developing, and the price of gold is currently right at the neckline support line.
It seems likely that the support line could be broken, and the next support will be the 100-day moving average, currently at $2,248. If that support fails to hold, gold is likely headed towards the 200-day moving average, currently at $2,149, which essentially reverses the breakout, as the price would return near the March 1 level.
The other way to trade gold is using fundamental analysis, and trying to pinpoint the fundamental triggers behind the price moves. So, why did gold break out on March 1, and what were the fundamental triggers? This is a question that many asked during the initial stage of the breakout.
I wrote an article on March 6, stating that there were no fundamental triggers justifying the gold breakout, and that gold was mainly following the spike in bitcoin price.
Gold is attempting to break out to new all-time highs, but it has failed multiple times before.
There are no valid fundamental reasons that support a sustainable gold breakout over the near term.
It seems like gold is rising due to the spike in Bitcoin within the context of a broader speculative environment.
When we look at the recent chart comparing the price of Gold (NYSEARCA:GLD) with the price of Bitcoin USD (BTC-USD), we can see almost a perfect correlation over the last year, where it seems like Bitcoin leads the price moves, and Gold follows.
Thus, the thesis that Gold is simply following the price of bitcoin seems valid, within the context of "a broad speculative environment".
The speculative environment and the Fed
It seems like Gold is currently bundled with speculative assets that are thriving on market liquidity and reacting to the Fed's expected monetary policy. In simple terms, Gold is trading like Bitcoin, a meme stock, or a GenAI-themed bubble stocks.
And it's not just Gold. Most metal prices have been caught in the mania. The price of Silver (SLV), Copper (OTC:JJCTF), and Platinum (PPLT) all recently spiked, to multidecade highs or even all-time highs.
The speculative environment is due to expectations of the premature Fed interest rate cut. The market has been expecting that the Fed would cut interest rates for the first time at the June meeting, or possibly at the July meeting.
Further, the expectation was that this would be a premature cut, possibly a politically motivated cut before the US November election. The premature cut implies that inflation would be well above the Fed's 2% target, and more importantly, the inflation drivers would still be active, triggering a rise in inflation.
For example, if the Fed cuts while the unemployment rate is still very low and the labor market is still tight, it is likely that wage growth will accelerate and boost service inflation. More importantly, if the Fed starts cutting interest rates while the housing prices and the stock market are still near their all-time highs, the wealth effect is likely to accelerate core inflation.
So, this is exactly what the market has been pricing, the Fed would cut interest rates prematurely, inflation would accelerate, and the asset price bubbles would reinflate.
In this situation, the US Dollar (UUP) would also significantly weaken, which would boost the global economy and the demand for commodities.
Gold benefits in this situation, as 1) the inflation hedge, and 2) the hedge against the weak US dollar.
On the other hand, it's a question of whether the correlation between Gold and Bitcoin is spurious or not. Bitcoin is "marketed" as a safe asset with limited supply, or like digital gold. Both Gold and Bitcoin are viewed as assets that could benefit from de-globalization, an escalating geopolitical situation, and a potential loss of the US Dollar's reserve currency status. It's known that China is buying gold and selling Treasuries, and this is potentially driving Gold higher.
However, it's becoming clear that the Fed is not going to be able to lower interest rates before the US election, especially after the strong May labor report. Thus, the US Treasuries are repricing the policy outlook to higher-for-longer, and interest rates are increasing access to the curve. This is what's crushing Gold, as well as other metals, and strengthening the US Dollar.
Implications
The easiest way to allocate to Gold is via the SPDR® Gold Shares ETF (GLD), which tracks the price of physical gold with 0.40% annual management fees. Long-term investors should hold some percentage of their portfolios in Gold, just because Gold is not correlated to other assets over time.
However, over the near term, Gold is currently trading like a speculative asset, where the positive catalyst is mainly the expected pre-mature Fed cut. Given that the Fed is unlikely to cut prematurely, I would not be buying gold at the moment.
The Fed is likely to cut interest rates when the recession arrives, and the initial stage of the recession will likely be the flight-to-quality to the US Dollar, which is negative for Gold, and other speculative assets.
In my playbook, Gold will start rising when the Fed starts pushing real interest rates into negative territory, and we are not even close to that scenario yet. Thus, I continue to recommend a Hold for Gold. Given the uncertainty with respect to the geopolitical situation, some short-term exposure to Gold is recommended, so I do not recommend a Sell (Short), even though the price of Gold is likely to fall over the near term as the Fed deflates the speculative bubbles.
