(Kitco Commentary) - I was wrong about an upward breach of the down-sloping parallel channel in gold. A run to $5,000 in the short term has become increasingly unlikely. The probability has shifted firmly in favor of a continued, slow downward grind.
The channel itself, however, remains almost perfectly intact, as shown on the 4-hour chart below, with price now also sitting at horizontal support.
In hindsight, the fact that the new Fed Chair presented a hawkish tone from the outset should have made this an obvious call. Was there ever much chance that a new Fed Chair would risk stoking the embers of an inflationary environment that remains far from fully under control? Regardless, unless you believe Mr. Warsh will steer the Fed toward outright deflation, the gold story continues, in my opinion.
Can the price drop to $3,500? Yes, it can. Unless gold breaks out of the channel and finally forms a higher high, there is a real chance that such a decline will occur, possibly over a prolonged and frustrating period.
I am also watching the U.S. 10-year Treasury yield closely, as it appears poised for a move back toward 5%. Such a move would likely pressure gold prices and potentially weigh on other asset classes as well. We also know that, in today's environment, with the stock market effectively serving as a barometer for the broader economy, policymakers are unlikely to tolerate the risk of an overt, immediately visible recession or depression for very long.
Participants who recognize that periods of gold weakness driven by expectations of higher interest rates have historically presented attractive long-term buying opportunities may choose to continue building their positions through a disciplined dollar-cost averaging strategy.
Good luck.
