Nearby COMEX gold futures have eclipsed the $2,000 per ounce level three times since August 2020. After the August 2020 high, gold corrected before gaining steam to move above the price again in March 2022. Another downside correction followed, but gold rose above $2,000 in March 2023 and traded above the level in April and May before falling below again. On July 12, the nearby August COMEX gold futures were back above $1,960 per ounce.
Gold closed Q2 at $1,929.40 per ounce and was moving higher on July 12.
A double-top in May 2022 caused a correction
Double tops on charts are reversal patterns that can trigger significant downside corrections.
The chart highlights nearby continuous contract COMEX gold futures rose to a record $2,063 in August 2020. In March 2022, the gold futures rose to a marginally higher all-time peak at $2,072 per ounce. The May 2023 rally stopped dead at $2,072, creating a bearish double top in the gold futures arena, leading to a correction that took the leading precious metal to a $1,892.50 low in June 2023. At over the $1,960 level on July 12, gold was moving towards the midpoint of the June 2023 low and the May 2023 double-top peak.
Rising interest rates are not bullish
Rising U.S. interest rates weigh on gold prices for three reasons:
- The global reserve currency, the U.S. dollar, is the worldwide pricing mechanism for gold.
- Rising U.S. interest rates increase the cost of carrying gold inventories.
- Higher U.S. interest rates attract capital from gold and other non-interest-bearing assets to fixed-income assets.
U.S. short-term rates have risen from zero to over 5% since March 2022, with the FOMC continuing to forecast even higher rates over the coming months. Quantitative tightening has put upward pressure on rates further on the yield curve.
The iShares 20+ Year U.S. Treasury Bond ETF (TLT) chart shows a substantial decline from the $179.70 March 2020 high to the $91.85 October 2022 low. At around $100 per share on July 12, TLT remains not far above the low, as rates are near multi-year highs. The bullish trend in interest rates and bearish trend in bonds are traditionally bearish for gold.
Meanwhile, the latest June CPI data on July 12 showed a decline in the inflation indicator, which could temper the Fed’s hawkish monetary policy path.
De-dollarization is bullish
Since the U.S. dollar is gold’s international pricing mechanism, a strong dollar tends to weigh on the precious metal’s price as declines in other currency values cause gold to rise in different foreign exchange instruments, encouraging selling. Conversely, a weak U.S. currency is typically bullish for gold as the price falls in other currency terms, encouraging buying.
In mid-2023, the global financial landscape is changing because of the ongoing war in Ukraine, China’s alliance with Russia, and Chinese and Russian relations with BRICS countries. The rising potential for a BRICS currency that challenges the U.S. dollar’s reserve currency position could weaken the U.S. currency, causing dollar-based gold prices to rally. Moreover, a BRICS currency with gold backing expand the precious metal’s role in the worldwide financial system. Russia recently confirmed that Brazil, Russia, India, and South Africa will introduce a new trading currency backed by gold.
Central banks have been buying gold over the past years. China has been attempting to end the U.S. petrodollar monopoly by purchasing Saudi Arabia’s oil in yuan, the Chinese currency. The emergence of a BRICS currency could challenge the dollar’s worldwide position. Since the U.S. currency is a fiat, backing a BRICS foreign exchange instrument with gold could lead to success in de-dollarization. Countries worldwide, including the United States, own gold as an integral part of foreign exchange holdings, validating the precious metals’ role in the global financial system.
A successful BRICS currency could increase gold’s financial role and cause the dollar price to rise.
The golden bull market is almost a quarter-of-a-century old
Gold’s bull market began in 1999 when the United Kingdom auctioned half its national gold reserves, sending the price to a $252.50 per ounce low.
As the chart dating back to the 1970s shows, gold has made higher lows and higher highs since the 1999 bottom. While the recent bearish double-top formation caused a correction, gold prices remain above the $1,960 per ounce level in July 2023, and the nearly two-and-one-half-decade bullish trend remains firmly intact. Since the turn of this century, buying gold on dips has been the optimal approach for traders and investors. A BRICS currency backed by gold could turbocharge the bullish trend.
Central banks were recently net sellers, but their appetite for gold will likely return
Central banks have been net gold buyers over the past years, but the buying flipped to selling in April 2023, thanks to Turkish gold sales. Turkey sold 81 metric tons of gold in April.
In May 2023, worldwide central banks bought 50 tons while Turkey sold another 63 tons, leading to a 27-ton decline in net holdings. However, since China and Russia consider gold holdings state secrets and strategic national security matters, and they are both leading gold-producing countries, net holdings likely rose as they continue to vacuum domestic production.
I remain bullish about the prospects of higher gold prices over the coming months and years. A BRICS currency backed by gold may only exacerbate the upward trajectory of the metal’s price. Gold is a hybrid, a commodity, and a financial asset. The correction since the May 2022 high could be another in a long series of golden buying opportunities in the current geopolitical environment.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
