At recent lows around $1075 an ounce, gold has been trading at the lowest price level since February 2020. And, in recent days, the metal has been consolidating in a narrow range just under $1100.
Now, it looks to me like gold is poised to break out one way or the other – but the question remains “Which way?”
The answer may depend on some exogenous “outside the market” development, possibly a sharp sell-off in world equity markets or a spate of negative economic indicators making it less likely the Fed will raise interest rates this autumn as most pundits expect.
Gold may be out of favor on Wall Street . . . but not on Main Street.
While many hedge-fund managers, institutional speculators and the financial press have railed against the yellow metal, retail investors around the world have seen a bargain at recent lows and have stepped up their purchases of physical gold.
More than anything else, it has been the U.S. federal reserve's ambiguous interest-rate policies that have weighed heavily on the metal. Financial-market expectations of an imminent increase in interest rates have driven the U.S. dollar's exchange rate higher against key foreign currencies.
Today, the dollar index stands at a 12-year. As the greenback has appreciated, gold priced in dollars, has fallen along with oil and many other commodities priced in U.S. dollars.
Simply put, institutional speculators – including the big bullion banks – have shorted gold on futures and other derivative markets while ETF-investors have dumped bullion, driving its price lower, and, at the same time, supplying Shanghai and other eastern markets with physical metal.
Indeed, it has been the continuing flow of gold from Western to Eastern markets that explains why gold has performed so poorly in the face of continuing strong demand from the large Asian markets.
Despite gold's disappointing performance in the past three years – and the real possibility we could see further weakness in the days ahead – I believe gold will perform exceedingly well versus most other investment assets over the next five-to-seven years.
