Andrew Pyle
March 15, 2024
Breaking out of a golden orbit
Many of us got to re-live our childhood memories this week, of watching science fiction shows after school with scenes of massive rockets blasting into outer space. The third launch of SpaceX’s Starship was a success, at least in terms of getting the craft into orbit, thus bringing the company and its owner one step closer to realizing a goal of traveling to the moon and ultimately Mars. It wasn’t the only thing blasting through the clouds. Gold recently hit a new record high in a near vertical ascent that began a few weeks ago. Whether its flight path takes it out of orbit remains to be seen.
For close to four years, gold has been largely unimpressive, moving in a $1600-$2000/oz range, following the surge in 2019-2020 that saw the yellow metal add close to $800 or 64% in the space of about a year. Back then, the flows into gold were spurred by lower interest rates and economic uncertainty. The rally in the fourth quarter of last year was based on similar factors, as investors became convinced that U.S. economic weakness would force the Federal Reserve’s hand and result in a sizable interest rate decline in 2024.
Indeed, in mid-December, gold had rallied almost 18% in a little over two months. Optimism began to wane when it became clear that rates may not move down as much as thought, meaning the U.S. dollar might not decline by as much. There were still global factors at play, like increased tensions in the middle east, an ongoing war in Ukraine and concerns that relations between the U.S. and China and Iran were becoming even more strained.
What is hard to explain is why gold jumped more than 10% on an intraday basis from mid-February to last week, when it hit a new high and came close to breaking $2200. If anything, the view that the Fed was going to delay rate cuts became more pronounced into March. Geopolitical concerns have crept higher, but not materially different than what we were dealing with in February. Analysts have suggested that program or algorithmic trading, coupled with increased retail investor interest, has created the latest pop. Regardless, there has been a shift in market sentiment towards gold, with calls for a continued climb into the stratosphere and beyond. We might have to wait a bit.
For one, technicals are not friendly to gold this week. While it did make a new record high, it became quite overbought on a relative strength (RSI) basis. The 14-day RSI broke above 80 for the first time in two years (levels above 70 are generally considered to be an indication that a security’s price is overbought). The RSI plays another role in trying to determine if a security has run its course and that is whether a new high in the security’s price is matched by a new high in the RSI. Back in 2020, when gold broke $2000 for the first time in history, the RSI came close to 90. Last Friday’s record high of $2195 saw the RSI top out at 84.
The retreat in gold in the last few days may be profit-taking after the speculative rush leading up to last week’s high. It might be that gold demand surge from the Lunar holidays has ebbed. More likely, it is a combination of technicals and fundamentals. This week’s consumer and producer price data out of the U.S. has argued against any near-term rate cuts and has also added water to a more recent seed that perhaps rates haven’t finished going up.
Earlier this week, the February CPI report showed prices moving up by 0.4% on the month and while this was in line with expectations, the 0.4% gain in core CPI (ex-food and energy) was a tenth above market consensus. Headline inflation rose to 3.2% from 3.1% and core inflation edged down only a tenth of a point to 3.8%. Investors shrugged the report off, but weren’t able to on Thursday morning, when producer prices showed a 0.6% advance in February – double estimates – and the core PPI rose 0.3%, again a tenth above consensus. Keep in mind that the initial progress on bringing down inflation from the multi-decade highs of 2022 came from a decline in producer price inflation and consumer goods. Services prices have been stickier (like shelter), but what if goods prices are going to move higher?
Let’s bring this back to gold discussion. If we delay rate cuts in the U.S., then this would suggest a stronger U.S. dollar than initially thought. The DXY dollar index has actually moved modestly higher this week in response. Actually, if this dollar rebound holds, it will mark another higher low for the chart (going back to July). We are still in the camp where rates do come down this year, though more modestly than what investors thought. This will ultimately put the dollar back on a downward trend, and that ultimately plays into further gains for gold.
How much of a pullback we see depends on next week’s Federal Reserve meeting (and commentary) and upcoming data. Ignoring the slide from 2011 to 2015 (more than 40%), recent corrections have been anywhere from about 10% to 17%. If this holds, then we could see a retracement to just below $2000 or perhaps $1800. The outlook, however, remains constructive based on ultimately where U.S. monetary policy goes, ongoing geopolitical tensions and uncertainty as to what happens in November.
Back in 2011, investors thought the long-term rally in gold was over, only to see it come back. Even though gold may experience some near-term turbulence, the fundamental backdrop still looks constructive
On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.
Andrew Pyle
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Andrew Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough. The views of Andrew Pyle] do not necessarily reflect those of CIBC World Markets Inc.
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