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Gold to breakout as recession hits

Commentaries & Views

Gold's winter rebound thwarted a 2013-like scenario. However, the sharp February selloff and nasty monthly candles reflect no bull market yet.

Gold is stuck but remains in a larger handle consolidation within a super-bullish cup and handle pattern.

I am not a fan of trendline and channel analysis as it is prone to error, but the handle consolidation is trading within parallel trendlines.

More importantly, the handle, now two-and-a-half years old, has spent 98% of its time above the 38% retracement ($1675).

Gold has not broken out yet because of the Federal Reserve's delayed but aggressive rate hikes, the large increase in real interest rates, and, most recently, the economy avoiding recession.

However, while a recession is not imminent, it is inevitable.

Leading economic indicators like the LEIs (leading economic indicators) and yield curve inversions are issuing stark warnings for the second half of this year.

Furthermore, rates above 3% have only been in effect for several months, and moving from 0% to 2.5% or even 3% is not that restrictive. Let's see how the economy fares when 4%-5% rates are in effect for another four or five months.

Precious Metals are getting hit because the adage of "higher for longer" is becoming a reality, at least for now. However, it likely increases the odds of a hard landing later. 

The average performance of Gold around a recession entails a move of nearly 20% from a low a few months before the recession through the first four months of the recession.

The performance of the 80th percentile is a 20% gain in the first four months of the recession.


Ultimately, Gold should begin its move to a breakout as the recession hits. Should Gold hold above $1700 over the next few months and a recession hits in the third quarter, then look for Gold to retest its all-time high by year-end.

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