Make Kitco Your Homepage

'Sound bull market': Gold sees best month since July, is $2,000 gold price next?

Kitco News

(Kitco News) Gold has made an impressive recovery in May, rising nearly 8% — the biggest monthly gain since July. And the market sentiment remains quite bullish, with many analysts eyeing the $2,000 gold price target for this year.

The precious metal was one of the last commodities to jump on the inflation narrative. What finally kicked off the gold rally was the disappointing U.S. employment and retail data, which helped to take prices firmly above the $1,900 an ounce level at the end of May.

Last month's higher inflation data and crypto volatility also pushed many investors back into the gold space, boosting prices.

"Gold is a fundamentally sound bull market ripe to resume its upward trajectory … [and it] looks to be at a discount in a bull market," said Bloomberg Intelligence senior commodity strategist Mike McGlone. "But it's also adjusting to sharing the global store-of-value space with digital newcomer Bitcoin. Having alleviated the overextended condition above $2,000 an ounce last year, the metal appears to have solid underpinnings on the back of about a 20% correction," McGlone noted.

One of the major trend reversals in May was investor demand coming back in the form of ETF purchases, which totaled 49 tons.

"They were the first monthly inflows since January and the biggest since September 2020. In view of the high inflation expected in the coming months and the significantly negative real interest rates as a result, demand among ETF investors should remain high, thus lending additional tailwind to gold," said Commerzbank analyst Carsten Fritsch.

The technical picture also remains bullish for gold, according to Kitco's senior analyst Jim Wyckoff.

"Bullish outside markets to start the U.S. trading week are helping out the precious metals market bulls—a lower U.S. dollar index and higher crude oil prices. The technical postures for both metals remain fully bullish," Wyckoff said Tuesday. "First resistance is seen at the overnight high of $1,919.20 and then at $1,925.00. First support is seen at the overnight low of $1,904.80 and then at $1,900.00."

The gold market has developed a solid floor after prices bottomed at $1,680 an ounce at the end of March.

"A solid gold base appears to be forming below $1,700," McGlone pointed out. "Seemingly unstoppable trends in rising debt and quantitative easing should keep gold buoyed. If crude oil peaks and yields decline, underpinnings for gold improve."

The bullish price outlook puts $2,000 an ounce within reach for gold, according to McGlone. "The top band at about $2,000 is good initial resistance but is more likely to act as a speed bump, notably if stock-market volatility rises … Rapidly rising fiscal and monetary stimulus should keep gold and Bitcoin supported," he said on Tuesday.

Commerzbank also projects to see $2,000 gold by the end of the year, citing inflation concerns and the Federal Reserve.

"The current debate within the Fed about a possible reduction in bond purchases is still very much in its early stages. If it were to take a more concrete shape, causing bond yields to rise, gold would briefly come under pressure – as has been seen in past months when yields increased. However, this is unlikely to weigh on gold for any prolonged period so long as yields remain below the rate of inflation. We, therefore, expect the price to climb to $2,000 per troy ounce by year's end," Fritsch explained.

However, analysts do warn of a likely wave of profit-taking once gold gets closer to $1,918 an ounce, which is the breakeven price for the year.

"Gold had a strong recovery, and it is susceptible to a correction. If employment beats expectations, yields will rise, and the U.S. dollar recovers," said Blue Line Futures chief market strategist Phillip Streible. "In gold, there are also many investors trying to get to breakeven on year, which is around $1,918. This puts gold at risk of profit-taking at these levels."

This is exactly what happened Tuesday morning when gold reached its 5-month high and traded at $1,915 an ounce.

"Gold has climbed to $1,915 per troy ounce this morning, putting it at its highest level in almost five months. It is finding support from a weaker U.S. dollar, while the fact that bond yields have returned to 1.6% no longer presents any problem," said Fritsch.

At the time of writing, August Comex gold futures were trading around the $1,900 an ounce level amid routine profit-taking.

Longer-term, gold is likely to remain well supported in light of the dovish Federal Reserve, said strategists at TD Securities.

"If inflation is indeed transitory, then we are likely to see a prolonged period of uber-easy monetary policy, which suggests that market pricing for Fed hikes is too hawkish and ultimately that gold prices could firm further," they wrote in a note. "Taper remains as the main near-term risk for the complex, but ultimately the Fed's AIT framework should result in a weaker USD along with stronger risky and real assets, including gold and silver."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.