Gold Recovery Goes into Week 3: Can Buyers Force the $5k Break?

Correlations can be tricky things. At times, it makes sense why two assets might be moving together, such as we saw between gold and stocks in early-March. But those situations can often lead into a case of divergence and that’s when correlations can be at their most challenging, because it opens up for the dreaded scenario where the trader ‘guessed’ or ‘analyzed’ correctly – but still ended up losing capital, and the trade, as the correlation didn’t hold as it previously had.

One only needs to look at a correlation coefficient of gold with stocks or bonds or the US Dollar to see that the relationship is far from lockstep. Sometimes it holds, others it doesn’t, and there’s usually some type of explanation for why, but that explanation is largely pointless because it’s just hindsight analysis that only becomes clear after it’s too late.

Where this matters is there’s another case of divergence happening currently, where the rally in gold isn’t exactly jumping through fresh highs while the rally in stocks looks to be stronger. In my opinion, both cases are a manifestation of hope that eventually, the conflict in Iran will be in the rear view. But the difference I think can be explained by the backdrop underpinning that hope, where questions remain as to whether the Fed will actually be able to cut rates and how long the drama drags on will denominate inflation which then provides context for rate policy.

So, if correlations are pointless for the trader, what should they then look to instead? In my humble opinion, price action, as that’s where we can get the most clear and objective look at what’s been happening from which we can then build expectations for what may happen.

In gold right now, that’s recovery, and I think the similarity in the recovery in equities is brought upon by the fact that ever since the Federal Reserve figured out that they could accumulate balance sheet, and drive Treasury yields down by being active buyers in the marketplace, they could, in essence, push growth in the US economy. There have been multiple risk factors flare since the Fed began buying bonds in the Financial Collapse but, to date, those have largely been shrugged off and stocks have just continued to trounce to fresh highs. Paradoxically, each of those sour periods in the market turned out to be pretty epic buying opportunities; with a big illustration around the Covid pandemic when equities ripped in historic fashion even with much of the global economy shut down.

Even the ramification of that, in 2022, when the Fed ultimately had to hike rates in response to the inflation that built due to that stimulus. Sure, it was a rocky first nine months of that year but once the Fed could start to signal that brighter days might be ahead stocks set a significant low in Q4 of that year, and then once again ripped in historic fashion.

Last year we dipped on the Liberation Day tariffs and this year, on the Iran conflict. Both of which carried the prospect of higher rates of inflation that could ultimately compel the Fed to tighten policy.

But, like a patient becoming immune to medicine markets have seemingly shrugged off those risks and instead focused on the horizon of when the Fed might ultimately be able to remove the pressure and get back to their stimulative ways.

This is perhaps no clearer anywhere else than gold, and the spark point of the current rally even draws back to a notable event that unfolded in front of us a little more than two years ago. As the Fed continued to see high rates of inflation, more than 50% above their own self-imposed 2% target, they were holding the carrot of rate cuts in front of the market which had helped equities to continue to rally in historic fashion.

On February 13^th of 2024, a CPI print was released far above expectations and markets warmed to the idea that, perhaps, we wouldn’t be getting those FOMC rate cuts that year after all. A ripple effect showed, as the Dollar gained and stocks sold off. Gold, which had been fighting with the $2k level for more than three years had spent all of the early part of that year holding above it – but suddenly, there was a sell-off and a pullback and the first daily close below $2k in spot gold since the year prior.

At the time, it looked like the year-long rally in stocks could quickly come undone as the rate cuts the Fed had been tempting the market with didn’t make much sense when inflation was clearly not yet under control.

But in a television interview a day later, a closely-watched Fed member in Chicago, Austan Goolsbee, implored market participants not to get ‘flipped out’ by a single inflation print. It wasn’t a single inflation print, by the way, as inflation had consistently printed above the Fed’s own expectations and targets. It was a pattern, and market are constantly trying to incorporate whatever data that they can and that’s why the knee-jerk reaction showed so prominently.

Goolsbee sounded less like an arbiter of policy and more like a lobbyist, and the market listened. Gold popped back-above $2k the following day and it never looked back. The rally only heated up more and more, with only consolidation along the way. Stocks rallied, the Dollar fell and later that year, even with Core CPI at 3.1%, the Fed ultimately cut rates a little more than one month ahead of the election.

Gold Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

Market Biases and a Lack of Linearity

While many traders track fundamentals in effort of trying to predict what will happen tomorrow, experience highlights that there will be occasions when fundamentals don’t seem to have the logical impact on price that they should. This is also why correlations shift, because facts change, as do the implications of those facts. But the reality is in a true market environment, only one things directly changes price and that’s supply and demand, buying and selling. And it’s true that often times that supply and demand can be impacted by fundamentals and facts, the reality is if everyone in the world that can be long of something already is, even the best news in the world will fail to push prices higher.

This is where technical analysis can come in.

But, let’s be clear, technical analysis is not perfect either as it’s simply an examination of the past. And the past does not perfectly predict the future. The hope for many technicians, I think, is that while history may not repeat, it might rhyme, and this is where something like price levels, or formations can come into play.

In gold since the bullish breakout began more than two years ago, there have been multiple periods of consolidation along the way. And each can clearly align with something happening in the headlines at the time which makes it that much more sensible. In the final two months of 2024, we saw gold pause after a near 40% rally but, instead, flows went into Bitcoin as President Trump was elected as a crypto-friendly candidate. And then after a jump up to $3500/oz in April, gold digested for four months as markets weighed the possibility of the Fed not cutting in 2025. But – as Jerome Powell indicated a willingness to do so in August, gold broke out in a bit way and rallied again, with that trend carrying into this year with prices bursting beyond the 5k marker.

But for the past few months, it’s been a case of consolidation and everything that happened in early-March, despite the seemingly clear alignment with risk trends, went along with that consolidative backdrop.

Gold Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

Gold Near-Term Strategy

At this point I think there’s still a defendable case for a bullish bias in gold. But, like we saw from April through August of last year, a lack of clarity around FOMC direction can give traders a reason to take profits on longs when price does bounce, similar to last week’s rally up to the 4850 level on the chart.

Pullbacks, however, can remain as attractive for positioning into gold and we’ve seen that, too, with last week’s defense of 4600 and, so far this week, a defense of 4700.

Near term resistance is at 4800 and then 4850 above that; but if bulls can push through that, the door opens for a re-test of the major psychological level at $5k. For that price to get taken out and accepted, it seems that we would need to see some type of catalyst that would get fresh buyers wiling to take on exposure above that level, which hasn’t yet happened.

Gold Four-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro