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If The Yield Curve Normalizes Gold Investors Grab Your Parachutes

Commentaries & Views

Just a couple weeks ago gold was on the edge and hugging the 200 DMA at $1274 where cautious bulls were carefully monitoring any potential break below this level before getting defensive. However, at that time we saw an uncommon phenomenon occur in treasury yields and this is what started this recent bull market and could keep it alive for months to come.

Ten-year treasury yields which move in the opposite direction from price have pushed down to 2.09% while short term rates like the 3-month treasury have held steady at 2.26% creating an inverted yield curve. This phenomenon has predicted the last four recessions and generally we see that recession occur within 7 to 24 months after the inverted yield curve has lasted for more than a quarter. Looking at the CME FedWatch Tool there is a 24.5% chance of a 25-basis point cut predicted at the June 19th meeting and an 87.4% chance at the July 31st meeting. This combination should continue to lend support to precious metals markets. 

Looking at the August daily gold chart you can clearly see how important the 200 DMA played a role as psychological support and how the 100 DMA acted as resistance back in mid-May. Your key trigger to initiate a bullish position was the May 31st green shoot through $1300 and the open and continuation higher on June 3rd. This is an ideal textbook breakout and with stochastics pushing into overbought territory indicating that we are in a bull market along with a rising ADX showing that the strength of the trend is growing, we have the potential to extend this rally to $1400 given a breakout above the February high of $1361.50.

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