We are just over a quarter into 2023 and it has already been a very good year for the precious metals complex. But this is likely just the beginning of the sector's best year since the Global Financial Crisis put in a major gold bottom in 2008 when the Fed was forced to recapitalize the U.S. banking system.
After an explosive move in Gold Futures came within $25 of all-time highs last week, an overbought consolidation of recent outsized gains has been taking place around the key $2000 level. With the gold price posting an outside reversal to the downside last Friday, some healthy profit taking is expected to continue in the short-term before new all-time highs can be achieved.
Before the important multi-year resistance level of $2000 can become sustainable support for bullion, a monthly close above this psychological number may be required beforehand. Although Gold Futures managed to post all-time high closes on both a monthly and quarterly basis in March, its price stopped $15 short of the key $2000 level. Technically, a monthly basis close above $2000 is required for momentum trader follow through buying.
Once gold broke out above the key $1000 level on a monthly basis after its fourth try in mid-2009, the price had nearly doubled by late 2011. The recent push towards the all-time high at $2089 reached in August 2020 is the third challenge of the resistance zone of $2000-$2100.
Markets tend to not break out on their third attempts of major resistance zones, based on a study of technical analysis spanning several decades. Following this current pullback, gold should prepare for its fourth and final attempt to clear this 12-year resistance area.
However, a sustainable fundamental trigger is required and will present itself at the appropriate time to cause the breakout, which may come from a policy mistake out of the Federal Reserve during the upcoming FOMC policy meeting on May 2-3. Heading into the Fed’s blackout period next week, gold would maintain a bullish bias above $1975 and there is uptrend support from the November low at $1900.
According to the CME FedWatch Tool, markets see an 86% chance that the Federal Reserve will raise interest rates by another 25 basis points next month. Yet, markets see a stronger than 80% chance that the Fed will lower its policy rate back to the range of 4.75%-5% by September, even if the central bank opts for a rate hike at the upcoming FOMC meeting.
Nevertheless, gold has been looking ahead to the end of 2023 and beginning to price in an extended rate-cutting cycle from the Fed. If we use the 2-year U.S. Treasury Yield as a guide for where the Fed Funds Rate is heading, then the world's most powerful central bank is going to cut at least 100 basis points over the next year.
After Fed officials declared premature victory on inflation and labeled 2023 as the “Year of Disinflation,” policymakers continue to raise rates while being convinced that the economy is heading for a “Recession” this year. Gold has been sniffing out an end to the most aggressive rate hikes in history, a global credit squeeze caused by the recent banking crisis, and persistent geopolitical turmoil.
With the gold price threatening a technical breakout, keep a close eye on the technical picture of the bearish Head & Shoulders top in the U.S. Dollar. The DXY is coming close to critical neckline support level at 100. Unless the greenback can avoid a convincing break below this key level, a close below 100 may be enough to fuel a breakout in Gold Futures above $2100 in the not-too-distant future.
Exceptional actions taken by the U.S. and its allies against Russia in March 2022, while simultaneously removing the country from the international SWIFT system, has created a BRIC’s block of nations de-dollarization trend. More and more countries, led by China and Russia, are making bilateral trade agreements that exclude the U.S. dollar.
U.S. Treasury Secretary Janet Yellen also warned this week that the use of sanctions threatens the dollar's dominance. Using sanctions against countries like Russia can put the U.S. dollar's hegemony at risk, Yellen told CNN on Tuesday.
"There is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar," Yellen said. "Of course, it does create a desire on the part of China, of Russia, of Iran to find an alternative."
Moreover, eastern central banks have been selling U.S. Treasury holdings to purchase gold as a preferred reserve asset, buying record amounts in 2022 and into Q1 2023. Even French President Emmanuel Macron recently called for Europe’s strategic autonomy, turning away from the U.S. dollar.
Also, the nightmare scenario of a recession, accompanied by further Fed rate hikes took one step closer to reality on Thursday. The Philly Fed Manufacturing Activity Index significantly missed expectations to post a reading of -31.3 in April, its 8th negative monthly reading in a row.
Each time this index has previously posted a reading this low, the U.S. headed into recession. The last time the Philly Fed Index registered such a deeply negative reading was during the peak of the April/May 2020 global covid lockdowns.
After mentioning the miners becoming overbought in this space last week, a healthy consolidation of recent gains in gold stocks is taking place as well. This is a great time to accumulate a basket of quality juniors on weakness before a new bull market in precious metals stocks attracts generalist investors. Once Gold Futures post a technical breakout with a monthly close above $2100, investors will start piling into this relatively tiny sector en masse.
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