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Will Gold Rally Continue Into Upcoming Months?

By Sunshine Profits (Arkadiusz Sieron)CommoditiesJun 10, 2021 10:53AM ET
www.investing.com/analysis/will-gold-rally-continue-into-upcoming-months-200585350
Will Gold Rally Continue Into Upcoming Months?
By Sunshine Profits (Arkadiusz Sieron)   |  Jun 10, 2021 10:53AM ET
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May was certainly a positive month for the yellow metal. Gold could keep its momentum later this year, but a lot depends on the Fed and inflation.

We left May in the rearview mirror, and as the chart below shows, it was the second positive month in a row for the yellow metal. Goldrose 7% last month – and 12.3% since the local bottom on March 31, 2021. The jump was driven mainly by inflation fears, a weak greenback and a decrease in real interest rates.

Gold Prices In 2021.
Gold Prices In 2021.

Hence, I was right: the second quarter has been so far much better for the shiny metal than the first one, in which it declined by 11%. Gold even jumped temporarily above $1,900 at the turn of May and June. Since then, it has been fluctuating around this level. All this means that the yellow metal fully recovered its Q1 losses, finishing last month virtually flat year-to-date.

Now, the key question is: What’s next for gold? Outlooks are, as always, divided. Some analysts point out that gold’s struggle to move decisively north above $1,900 amid all the increase in the money supply, public debt and inflation is disturbing and has bearish implications for the future. For instance, the French bank Société Générale still believes that we will see $2,000 per ounce by the end of the year, but its conviction towards this forecast has weakened. I have to admit – the lack of a stronger rally in gold is something I also worry about.

But on the other hand, some believe that gold is still in a long-term bull trend. For instance, the World Gold Council, in its latest Gold Market Commentary, points out that sentiment towards gold became more bullish in May, as net positioning on COMEX futures rose to its highest level since February. Moreover, not only gold ETFs recorded their first monthly inflows since January 2021, but also the highest ones since September 2020.

Furthermore, the WGC’s 2021 Central Bank Gold Reserves Survey reveals a slightly stronger conviction towards gold, as there is a growing recognition among central banks of gold’s performance during periods of economic crises. The report notes that 21% of central banks expect to increase their gold reserves within the next year (value relatively unchanged from last year’s survey) and that no central bank expects to sell gold this year – down from 4% in 2020.

Also, CCommerzbank remains bullish on gold despite recent volatility. Although the German bank expects that the Fed will start tapering its quantitative easing by the fourth quarter, it’s forecasting rising inflation. As a result, nominal interest rates will stay below the inflation rate leaving real bond yields significantly below zero.

Implications For Gold

What does all this imply for the gold market? Well, there are both downside and upside risks for gold in the future. Possible drawbacks are the unwinding of the Fed’s bond-buying program and the new tightening cycle . Strengthening expectations of asset purchases tapering and normalization of the ultra-dovish monetary policy could trigger an increase in the interest rates and outflows from the gold market.

To the other group of factors, I would include higher inflation. After all, we have never seen such coexistence of dovish monetary policy and easy fiscal policy. Not surprisingly, investors started to worry about record-breaking inflation. As the chart below shows, market-based probabilities derived from options (calculated by the Minneapolis Fed, which computes probabilities from option prices) show that the previous expectations of the CPI annual rate above 3% over five years have significantly increased recently. Higher inflation would increase demand for gold as an inflation hedge and decrease real interest rates, supporting gold prices.

CPI Chart.
CPI Chart.

So, gold’s future depends on the Fed’s reaction to rising inflation, or whether or not investors will focus on nominal and real interest rates. If the U.S. central bank stays behind the inflation curve, real interest rates will stay in the negative territory, supporting the price of gold. However, if the Fed tightens its monetary policy decisively, or if investors focus on rising nominal bond yields in a response to inflation, the yellow metal may go down.

To that point, the most recent changes in the Fed’s framework, comments from the FOMC members and disappointing data about the U.S. labor market suggest that we are far away from any serious tightening. So, gold has room for moving higher.

Having said that, it seems that gold needs more negative events (or even a kind of financial crisis) to rally decisively further. So far, the U.S. economy remains in the boom phase and higher inflation doesn’t seem to significantly disrupt the functioning of the markets. Perhaps gold bulls will have to wait a bit longer until we move from reflation to stagflation. Today’s report on inflation and upcoming FOMC meeting could provide more clues about gold’s future. Stay tuned.

Will Gold Rally Continue Into Upcoming Months?
 

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Will Gold Rally Continue Into Upcoming Months?

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Comments (6)
moving from
moving from Jun 11, 2021 12:52AM ET
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"However, if the Fed tightens its monetary policy decisively", come on really? is the Fed going to commit harakiri? any interest raise will strangle an economy with debt level up to it's eyebrows
Edward Chong
Edward Chong Jun 11, 2021 12:52AM ET
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i fully agree with u. but gold is really very weak now any hint of tampering the shorts will be in.
Casino Crypt
CasinoCrypt Jun 10, 2021 9:16PM ET
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Just the ultra trillions of dollars in debt owed by the world economies is enough to have Gold sitting on  $5000 an ounce.  This debt cant ever get payed back and so Gold will always be the lifeboat asset.
Vivek Singh
Vivek Singh Jun 10, 2021 9:08PM ET
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"upcoming months" in the headline is not appropriate grammar. it should be "coming months".
Tubsy SkinntFinger
TubsSkinnyFinger Jun 10, 2021 4:35PM ET
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Why do u and your mate continue to publish rubbish articles here?  "there are both downside and upside risks for gold in the future" Riveting
Darren Ikin
Darren Ikin Jun 10, 2021 4:35PM ET
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where's ur article?
Tubsy SkinntFinger
TubsSkinnyFinger Jun 10, 2021 4:35PM ET
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Darren Ikin  I dont claim to be an "expert", nor do I spout crapola every time I open my face
Fabio falec
falec Jun 10, 2021 3:31PM ET
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I don't understand why you stated that gold would need more negative events. GFC occurred in 2007-08, the market crashed and started to recover in 2009. When did you see gold peaking? In 2009? Nope, it peaked in late 2011 with the market almost fully recovered from the huge drop and the crisis in the rear mirrors...
Kevin McCarthy
Kevin McCarthy Jun 10, 2021 11:34AM ET
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South Africa gold mining production number was incredible. slightly surprised you made no mention of it. I understand the bear case, that more production means more supply. As for the bull case, there has never been a gold glut and increased production could be an effect of increasing demand. would love to hear your thoughts.
 
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