Gold’s Rally To Resemble The Surge In Natural Gas - Bloomberg Intelligence
(Kitco News) - Gold has the same upside potential as natural gas right before its rally earlier this year, said Bloomberg Intelligence (BI), adding that “peak U.S. dollar” is key to gold’s potential rally.
“Indications from precious metals, notably gold, offer a setup that's similar to natural gas before its big rally,” BI senior commodity strategist Mike McGlone said in his update December outlook. “Bound to historically compressed trading ranges with many typical pressure factors nearing multiyear extremes, precious metals appear close to a maximum loss of faith vs. the strong stock market and greenback.”
McGlone highlighted a unique similarity between gold’s set-up and that of natural gas, which surged in November on supply concerns in the U.S.
“Much like natural gas earlier this year, gold has the drivers in place to rally from its compressed range. Increasing inflation and debt levels are positive companions, as is gold's divergent strength to the dollar,” he said.
The idea of the U.S. dollar rally topping is at the center of BI’s bullish outlook for gold prices, the outlook noted.
“Overdue normalization in the equity and crude-oil bull markets, and a subsequent reduction of Federal Reserve rate-hike expectations, indicate the dollar's run is at an elevated risk of ending,” McGlone wrote on Friday. “Mean-reversion risks in the trade-weighted broad dollar near the 2002 and 2016 highs may outweigh further appreciation potential.”
Gold is “ripe for a rally”, described McGlone, stating that the Federal Reserve monetary policy tightening could be nearing the end next year.
“The narrowest 24-month Bollinger bands for the longest period in 16 years indicate the metal's upside,” the strategist said.
On top of that, gold has been showing divergent strength in light of higher U.S. dollar, the outlook added.
“The best performer, gold, is down about 6% on a spot basis but would typically be much lower in such a backdrop. Relative to the trade-weighted broad dollar, gold's beta is minus 1.7 on an annual 20-year basis. A top-performing major asset class this year, the 8% increase in the dollar would normally be equivalent to dollar-denominated gold that's worth about 14% less.”