Breakout or Fakeout? Where Are Gold Prices Heading?
Will the $2,100 gold price hold?
This article recently appeared on my YouTube channel. Click here to view the original video.
Today, the price of gold sets a new record, breaking through its $2,135 all-time high.
This action begs three questions:
Is this the breakout we’ve been waiting for, or just another fakeout?
Why are prices going up?
How high can they go?
Ask yourself this question… What’s the bigger headline today? Gold hits record price or Bitcoin hits record price?
Obviously, it’s the latter. The halving of Bitcoin coming up next month, the Blackrock Bitcoin ETF, the pump, the hype, and the crypto scam channels are back in business all tell us that Bitcoin is the darling child for the moment.
Yet gold almost quietly seems to be breaking out without any pump or any hype.
We see the same headlines we’ve been seeing over the last few years.
This article is from Zero Hedge: Central Bank Gold Buying Expected to Remain Hot Over Next Several Years.
Central bank gold demand has nearly tripled and now makes up 25 to 30 percent of total global demand.
Why? It’s because they’re losing trust in the dollar.
ANZ analysts also pinpoint declining faith in the bond market - particularly U.S. Treasuries - as another reason central banks are diversifying into gold.
China was the biggest buyer in 2023, adding 225 tonnes to its gold reserves.
So there you have it. China is the biggest stacker in the world.
These types of headlines, although great for gold fundamentals, don’t move the market anymore.
Let’s look at what’s moving the market.
Another headline from CNBC: Mounting U.S. Rate cut bets push gold to record highs.
I’ve seen some people trying to explain why gold has surged and they look to the dollar index. Although the DXY, the dollar index, is related it’s not the cause. Fed rate cut expectations are moving the DXY which in turn moves gold prices.
Just very, very briefly here are the mechanics.
Fed rates go down which causes U.S. Treasury yields to decrease in step. Whether it’s treasuries, bonds, or t-bills… we’re basically talking about the same thing.
You, or I, or anyone can go to the treasurydirect.gov website to buy treasuries. Just create an account, link your bank account, and go buy one. T-bills are just short-dated treasuries with a maturity date of up to 1 year. When we buy a treasury we are in effect loaning money to the government and in return, they pay us interest on that loan.
As Fed rates go down the interest on treasuries goes down, which makes them less attractive to hold. Investors, institutions, and central banks are more inclined to put their money into gold during low interest-rate environments.
Here’s how that relates to the dollar index:
Attractiveness of US investments: When the Fed lowers interest rates, investments in US assets (like Treasury bonds) become less attractive to foreign investors. This is because they offer lower returns compared to other countries with potentially higher interest rates.
Demand for the dollar: As a result, there's less demand to buy US dollars to invest in these assets. This decreased demand weakens the value of the dollar versus other currencies.
DXY Composition: The DXY measures the value of the US dollar against a basket of major foreign currencies. So, a weaker dollar translates to a lower DXY value.
A lower DXY is the result of lower Fed interest rates. Higher gold prices are the result of lower Fed interest rates. Got it? Alright!
Analysts at WisdomTree expect…
We wouldn’t be surprised if gold gives back some of these gains as the Federal Reserve talks down imminent cuts, but once rate cuts look certain, we expect gold to trade significantly higher.
Let’s look at that gold chart again. The last time we talked about this chart was before the previous all-time high in December.
We talked about this triple-top which started back in 2020, then again in 2022, and finally in May of 2023 during the Silicon Valley Bank crisis.
We said that if gold could make a run for it and punch through that high and hold above $2,100 for a few days then there’s nothing stopping gold until $2,300 or $2,400.
And it did punch through in December and quickly got knocked back down below $2,100 where it’s stayed for over 2 months. That’s the moment I started believing in the price manipulation conspiracy theories a little.
Now we have a quadruple top, but this time is different. Over those 2 months, gold has been building a base above $2,000. Traders are not willing to let the price of gold go down in anticipation of rate cuts.
Can it hold above $2100? As the WisdomTree analyst pointed out the Federal Reserve may try to talk down rate cut expectations this week. It’s too soon to tell. But my opinion hasn’t changed that if we can hold above $2,100 this week then there’s nothing holding gold down.
In summary:
I do believe that this is the breakout we’ve been waiting for. The powers that be may try to knock it down, but it’s my opinion that those actions would only have short-term success.
Gold prices are moving higher primarily due to Fed rate cut expectations.
Gold could see $2,300 or $2,400 this year. As a reminder analysts at Citi Bank just recently said gold could go as high as $3,000 within a year or so.