Can Gold Retain Double-Digit YTD Gains?

Last week, gold hit a new record high, up to double digits since the start of the year, as investors fret over a looming recession. With the Fed now expected to cut rates three times this year, can gold continue going up?

Safety Ahead of the Storm

China bolstered its foreign reserves in April by buying up 260,000 oz of gold, the sixth consecutive month that the Asian giant has increased its holdings. Despite its high price, central bankers bought gold at a record pace last quarter, continuing the trend from last year. The most prolific buyer was the Monetary Authority of Singapore which added 69 tons to its reserves in the fourth quarter. A major seller was the Central Bank of Russia which saw its reserves drop by 6 tons.

There are several reasons supporting gold prices in 2023. Stalled talks over raising the debt ceiling in the US had raised the price of credit default swaps to a record high as investors fret that this time might be different from the many occasions before when the debt ceiling was raised at the 11th hour. Moreover, US inflation was reported slightly below expectations, weakening the dollar as the market moved to price in three rate hikes for the remainder of the year. On top of that, there are fading expectations that China's economy would rebound following the lifting of covid restrictions and potentially help avoid a global recession inspired by tight credit conditions. Finally, the collapse of three banks in the US and the emergency takeover of Credit Suisse are also seen as inclining the balance in favor of keeping value stored in something safe.

The Data Isn't There Yet

Gold's most recent excursion to hit a record high saw prices fading relatively quickly, with analysts pointing to profit-taking as a likely culprit. But US job creation numbers surprised to the upside, with unemployment matching record lows, and the Atlanta Fed's most recent estimate for Q2 GDP shows a relatively strong forecast of 2.7% annual growth for the current quarter.

If the Fed were to cut rates, it would be in the face of a severe market crunch. Fed staff projections already expect a "mild" recession, and even in that scenario, the Fed insists it will keep rates elevated. It's impossible to rule out a recession or market crash that could substantially boost gold. But, the reported economic data would have to be essential changes. Worries about a recession, the dollar losing its reserve status, and a US government default could push gold slowly higher in the meantime.

Triangle Projection At Play?

The price of gold has formed a wedge at $2065/oz, followed by a triangle completing by $1980. However, the measured move from the breakout point has not reached its typical 100% target of $2100, leaving room for bullish interpretation in the short term. Moreover, the last waves tend to extend in commodities, with 161.80% of the measured move settling near $2150/oz. Losing the triangle low would invalidate this idea.

In the medium term, gold prices have completed a 5-wave move upwardly, suggesting a potential correction, if not a full-blown reversal. The former case would send prices sliding to a consolidation phase, marked by a flag or pennant down near $1940/oz, while the latter could see prices tumble toward $1800/oz.

Key Takeaways

Gold hit a record high as investors worried about a recession, and the Fed is now expected to cut rates three times this year. Central bankers bought gold at a record pace last quarter, with China increasing its holdings for six consecutive months. Gold's price is being supported by stalled talks over raising the US debt ceiling, weakening US inflation, fading expectations of China's economy rebounding, and concerns over the collapse of banks.