Gold is in a consolidation phase, waiting for the markets to change their tune and drive the price higher.
- Gold bulls are piling on evidence in their case for the yellow metal, including real interest rates, inflation, and global economic growth. When will the price catch up?
- The past few months have lacked any convincing moves above or below $1,800/oz.
- The price needs to break above its declining ceiling to argue an end to the bear market that has suppressed gold all year.
Gold bulls are gaining strength
The bullish case for gold seems to get stronger every day, yet the price is still sluggish. Fortunately for gold investors, more and more market participants seem to be picking up on that evidence.
Here are just a few of the points gold bulls are clinging to:
Real Interest Rates
Case #1: Real interest rates (nominal rates minus inflation) are deeply negative and will stay that way. The Fed can’t afford to jack up interest rates because of government debt and extreme equity valuations.
Over the last 50 years, gold returns have exploded during times of negative real rates. In fact, average annual returns during negative real rates have surpassed 20%.
Economic Growth and Inflation
Case #2: Economic growth cannot keep up with inflation. As you know from our previous blogs, this is referred to as stagflation.
No one believes the “transitory inflation” narrative anymore. Industrial production fell 1.3% in September from the previous month. Many economists predict that supply chain disruptions will last until at least mid-2022.
Inflation is back to its 13-year highs and shows few signs of slowing down.
International Gold Demand
Case #3: The World Gold Council predicts that central banks will maintain or increase their gold purchases in coming years. Gold demand in China and India has increased dramatically over the last few months.
Central bank demand and consumer demand in India and China have a massive influence on the gold price. With these tailwinds, gold has a much better chance of reaching new all-time highs.
India and China are primarily responsible for consuming the supply of gold coming from gold mines. Analysts predict they will have no problem doing so in coming years.
Waiting and Consolidating
The chart below shows gold’s performance from the beginning of COVID-19. The ceiling has been in a rather sharp decline for months, although the $1,680 support level remains strong. A break above the red line would be extremely bullish, and a break below the green line would be extremely bearish.
For the past few months, gold has been consolidating between $1,700 and $1,800. The price hasn’t been able to gain much momentum away from this channel, in either direction. The pattern of lower highs indicates that gold is still cemented in its short-term bear market.
We are looking for a break above the blue line.
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