Gold's Time to Shine? (5 Bullish Catalysts)
For the past decade, gold has been a serial underperformer. However, five signs suggest that it may be the precious metal’s time to shine, including:
A “Dovish Fed” is a Positive
The theme of the U.S. Federal Reserve was “Hawkishness.” A Hawkish monetary policy refers to a stance taken by central bankers that emphasizes a proactive approach toward controlling inflation, often involving higher interest rates and tighter monetary measures to cool down economic growth. However, after recent inflation readings have come in cooler than expected, the market expectations for the Fed Funds Rate suggest four interest rate cuts in 2024.
Image Source: Charlie Bilello, Creative Planning
Lower rates should be a bullish catalyst for gold prices because lower rates tend to weaken the dollar. As a result, investors will turn to gold as a hedge against currency depreciation.
Commercial Traders are Overwhelmingly Short
Commercial traders are entities or individuals engaged in business activities related to the underlying assets being traded (in this case, gold). These traders are typically involved in the production, processing, or distribution of commodities and goods. Commercial traders often use futures contracts to hedge against price fluctuations, managing the risks associated with their core business activities. Historically, traders want to fade commercials when it comes to the gold market. Currently, commercials are more than 70% short.
Image Source: amCharts
Price is Emerging from a Multi-Year Base Structure
As the old Wall Street adage goes, “The longer the base, the higher in space.” It’s difficult to find a longer base than the SPDR Gold Trust ETF (GLD). GLD is clearing highs not seen since August 2020. In my experience, the longer and more frustrating a base structure is, the better it works when it ultimately emerges. Furthermore, volume provided clues on Friday. Turnover was heavy at more than two times the 50-day average.
Image Source: TradingView
Massive Deficit + Interest on Deficit
The U.S. faces a mindboggling deficit of $34 trillion and is growing rapidly. As the 2024 election approaches, investors must accept that fact that Biden and Trump, the two overwhelming frontrunners, are not known for their fiscal conservatism. Furthermore, interest payments are swelling, ranking fourth in spending (only behind Social Security, Medicare, & Defense). In other words, don’t expect a budget surplus any time soon – the last surplus for the federal government was in 2001!
Image Source: U.S. Treasury
U.S. Sanctions & BRICS Demand
BRICS is an acronym for an association of five major emerging national economies- which stands for Brazil, Russia, India, China, and South Africa (Egypt, Ethiopia, Iran, & the UAE have been added to the original BRICS recently) – known for their significant influence on regional and global affairs. BRICS was formed to promote cooperation and collaboration among its member countries, which are major emerging economies, to address common challenges, foster economic development, and enhance their collective influence on global stage. By working together, BRICS seeks to strengthen their positions in international institutions, promote inclusive development, and contribute to global economic governance reforms.
How does the BRICS impact the price of gold? The U.S. has levied severe sanctions on BRICS members such as Russia and newcomer Iran. With Russia locked in a multi-year conflict with Ukraine (with no end in sight) and Iranian leadership funding proxy wars on U.S. troops globally, the two countries are essentially barred from using the U.S. dollar and are forced to seek alternatives. In an effort to “de-dollarize” and provide an alternative to the U.S. dollar (which is no longer backed by gold), the BRICS countries have been dramatically increasing their purchases of gold on the international market – a trend that should last for years to come and put a floor under gold and gold proxies like the Van Eck Gold Miners ETF (GDX).
Bottom Line
After a decade of underperformance, gold appears poised for a comeback. Several factors, including a dovish Federal Reserve stance and a massive technical breakout bode well for the precious metal.
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SPDR Gold Shares (GLD): ETF Research Reports
VanEck Gold Miners ETF (GDX): ETF Research Reports
