Gold Bull Breakout – The much awaited Catapult after the Pullback

Gold prices hit a new record high of $2,150.50 in April Comex futures on Tuesday, with growing expectation of U.S. monetary easing and continued geopolitical risk buoying activity from momentum-driven funds which could propel the precious metal further. Gold prices have not just inched but leaped forward, drawing attention from investors and traders worldwide. This movement is far from arbitrary; it’s rooted in a tapestry of factors that together weave a compelling narrative for gold’s current allure. The current rally became dynamically stronger last Friday, March 1st when gold futures opened just at its 50-day simple moving average and gained $41 in trading. A wider robust fundamental backdrop added support, including strong physical demand in Asia and central bank purchases as well as bullion’s traditional safe-haven cachet. Central banks have been net buyers of gold for eight consecutive months. From a technical analysis perspective, gold may still have further upside towards $2,180, a Fibonacci projection level.

Precious metals traders this week are focusing on the prospects of easier monetary policies this year from the major central banks of the world. That would extrapolate into better consumer and commercial demand for metals and also theoretically pressure the U.S. dollar index and lower U.S. Treasury yields. The near-term technical postures for gold and silver have quickly turned more bullish, which is likely to invite some more chart-based buying interest in the near term.

Fed Chairman Powell addresses Congress on Wednesday and Thursday, and the monthly U.S. employment report will be out on Friday. The coming days, especially with the critical economic data releases and (Federal Reserve Chair Jerome) Powell’s testimonies, will be crucial in determining whether gold can maintain its current trajectory or if we’ll see a period of consolidation. It’s clear that the Fed will certainly cut rates and you’ll start to see the gold market move towards $2,300. Will it happen in next few weeks? Maybe not. But it will probably happen in the next six-month window. Everybody remains confident that the Fed will give them back their easy money soon and that will float the economy to the much-anticipated soft landing.

Ironically, the markets are desperate for the Fed to declare a win over inflation so it can go back to the inflationary policies that caused prices to spike, to begin with. Rising prices are a symptom of monetary inflation. And monetary inflation is exactly what we will get when the central bank reverts to a looser monetary policy.

So, this bull run in both gold and silver is justified. In fact, both are arguably underpriced given the fact that the economy is hopelessly addicted to inflation. The bubble economy needs easy money to run. That’s why the mainstream desperately wants it back. Since gold and silver both serve as inflation hedges, prices should arguably be much higher.

Commodities Soar on Fed’s ‘Operation Twist’ Hint

Last week, Federal Reserve Governor Christopher Waller – one of the central banks most influential voices – dropped a bombshell on the markets by suggesting that he would like to see two key developments in the Fed’s portfolio. Firstly, the Fed’s agency Mortgage-backed Securities holdings going to zero. Secondly, a shift in Treasury holdings toward a larger share of shorter-dated Treasury securities. – Phil Carr

In other words, Fed Governor Christopher Waller hinted that he would like to see the Central Bank revive ‘Operation-Twist’ in order to reassert stronger control over interest rates at both ends of the yield curve. Essentially, that’s the Fed extending Quantitative Easing without actually calling it Quantitative Easing.

According to GSC Commodity Intelligence – the last time, the Federal Reserve rolled out ‘Operation Twist’ in 2012 – they unleashed an explosive money-making storm that sent Commodity prices across the board from the metals, energies to agriculture skyrocketing to fresh multi-year and all-time record highs.

Waller’s comments ignited a scorching rally sending Gold prices blasting above the key $2,100 an ounce mark for first time in 2024. The bullish momentum also split over into other Commodities with Silver, Palladium, Platinum, Copper, Nickel, Zinc, Natural Gas and Crude Oil prices – soaring to fresh multi-month highs.

But the real star performer was Cocoa. Cocoa prices have been on an unstoppable run this year, breaking new all-time record highs, almost on a weekly basis. Last week, Cocoa prices continued their red-hot rally, surpassing $ 6,884 per tonne to hit a new historic record high – notching up a whopping gain of over 300%, from this time last year.

Looking ahead, this now positions a string of critical economic readings due this week as the key arbiter for where Commodity prices could go next. This includes JOLTs job opening figures, ADP private payrolls data and all-important February Non-Farm Payrolls Report.

Elsewhere this week, traders will be closely monitoring the outcome of Federal Reserve Chair Jerome Powell’s two-day testimony before Congress – which may shed more light into Fed Governor Waller’s comments about a potential revival of ‘Operation-Twist’.

Technical studies suggest gold is overbought

Gary Wagner – This latest rally is not broad-based but rather fueled by a “jump in speculative betting”, according to Adrian Ash, director of research at BullionVault. Speaking to MarketWatch he said there is “no gold rush among Western investors right now, not in physical bullion and not outside Comex futures and options.”

Ash added that “gold exchange-traded funds continue to “shrink to pre-pandemic size; coin shops are slashing their premiums and buy-back prices to try clearing the flood of customer selling.”

The current rally is fueled largely by overwhelming optimism that the Federal Reserve will begin its pivot from interest rate hikes to its first interest rate cut since March 2022. However, this optimism is not in-line with recent comments of multiple Federal Reserve members including Chairman Powell. Fed officials continue to express the narrative that “they are in no rush to cut rates”.

Investors are hoping to gain more insight when Chairman Powell heads to Capitol Hill for his semi-annual testimony to the House and Senate beginning tomorrow. According to the CME’s FedWatch tool, there is a 97% probability that the Federal Reserve will not begin to cut rates at their March FOMC meeting and a 79.1% probability that the Fed’s benchmark Fed funds rate will remain unchanged at the May meeting.

However, this probability indicator dramatically favors a rate cut by June with only a 27.2% probability that they will not cut rates in June.

That being said, there are technical indicators that suggest that the recent rise in gold prices has put the precious yellow metal in an overbought situation. The chart above is a daily Japanese candlestick chart of gold with a stochastic oscillator. This study indicates that gold is very much overbought well over 80%, with the %K line crossing below the %D line which signals a strong potential for gold prices to decline. According to Investopedia, “ Stochastic oscillator charting generally consists of two lines: one reflecting the actual value of the oscillator for each session, and one reflecting its three-day simple moving average. Because price is thought to follow momentum, the intersection of these two lines is considered to be a signal that a reversal may be in the works, as it indicates a large shift in momentum from day to day.”

The chart above is also a daily Japanese candlestick chart with the RSI (Relative Strength Index) at 76.23. The RSI is a momentum indicator that measures the speed and magnitude of recent price changes used to evaluate if the market is over or undervalued. The RSI has moved above 70 indicating that gold is overbought and also suggests that gold could be primed for a trend reversal or a technical price pullback according to Investopedia.

While both of these technical studies strongly indicate that gold is overbought, the caveat to these momentum indicators is that gold could continue to rise and continue to be overbought. However, the fact that both of these indicators suggest that gold is extremely overbought warrants our attention as a potential indication that gold could pivot from its current bullish demeanor and signal imminent price correction.

Higher gold prices – the only antidote to an overvalued S&P 500 and global uncertainty

Neils Christensen – The gold market continues to move from one record close to another, even as its all-time highs remain elusive, which should attract investors’ attention, according to one fund manager.

Regardless of whether the gold’s four-day rally to $2,150 an ounce is sustainable or not, prices are going higher in the long term, said Ryan McIntyre, Managing Partner at Sprott Inc., in an interview with Kitco News.

Although some analysts are warning investors that the gold market is a little overstretched and could see a correction by the end of the week, McIntyre said that investors should ignore the near-term price action and focus on the bigger picture.

“Long-term, this is not the top for the market,” he said.

McIntyre pointed out that gold’s rally started in earnest Friday following disappointing manufacturing data. He said that he expects recession fears to continue to grow, creating further safe-haven demand for the precious metal.

He explained that even after gold’s latest move, it is still undervalued compared to the S&P 500.

“We’re getting more indications of a slowing economy, so people’s first thoughts are rates, right,” he said. “How do you take advantage of a rate cut? To me, it’s not necessarily clear that people should be buying the S&P 500. To me, it’s much more obvious that if you want to take advantage of rate cuts, you don’t do it with an over-bought market; gold is the far more logical avenue.”

McIntyre said it’s not surprising that the gold market is finally starting to attract some significant bullish momentum. While investors have been shunning gold for most of 2023, central banks have more than made up the difference, he added. Despite higher bond yields and a relatively stronger U.S. dollar, gold has held support above $2,000 an ounce through the majority of the new year, driven by central bank demand.

McIntyre added that he expects central banks to continue to buy gold even at higher prices.

“I would bet that central banks are not going to relent on buying gold because it makes less and less sense owning other people’s currencies in a growing disaggregated world, filled with uncertainty,” he said. “Investors are starting to recognize this trend and I think we will start to see new money flow back into ETFs, which could be the second leg that drives prices higher.”

Like central banks, McIntyre said that as the global economy weakens, investors will see gold as an independent hedge against risk.

“Gold is one of the best alternatives you have to the problems we see in the world today. It remains the best antidote to a recession, an overvalued S&P 500, and frankly to the geopolitical tensions around the world,” he said.

Gold has potential and so do gold miners

As attractive as the gold market remains, McIntyre said that he expects it will only be a matter of time before gold mining companies see significant momentum.

Analysts have noted that even with gold prices above $2,000 an ounce, sentiment in the mining sector has been fairly pessimistic.

McIntyre pointed out that while everyone has been chasing the momentum in the tech sector, they have been ignoring mining equity; however, he added that the trend is starting to shift, and higher gold prices will only add more value in an already undervalued sector.

As to what segment of the mining sector has the most potential, McIntyre said that the large-cap producers remain the most attractive.

“With gold prices where they are, these producers are literally printing money,” he said. “I don’t even think you have to wait for a buying opportunity. The gold miners are so beat up, there is plenty of room to buy.”

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Gold Bull Breakout – The much awaited Catapult after the Pullback