Gold Stages Major Breakout, Breakout Retest Likely N/T

Gold is regaining its lost luster. Last week, it staged what could turn out to be a major breakout. If genuine, the metal in due course could head toward retracing 61.8 percent of the September 2011-December 2015 decline.


Gold ($1,400.10) has gone parabolic in the past month – sort of. For a month through the third week of May, gold bugs defended $1,260s several times (Chart 1). Since that low through last Friday’s intraday high of $1,415.40, the metal jumped north of 11 percent – not only past the now-rising 50-day moving average but also crucial resistance at $1,350s-1,360s. Gold has been range-bound particularly in the past six years.

The yellow metal peaked in September 2011 at $1,923.70. Nearly six years went by before it bottomed in December 2015 at $1,045.40. Since that low, gold has made higher lows, but the afore-mentioned ceiling came in the way time and time again – until last week.


The physical gold has not seen a sudden increase in demand. The World Gold Council breaks down gold demand into four major categories – jewelry, technology, investment, and central banks. In 2018, overall demand rose 4.8 percent to 4,399 tonnes, essentially tying with the 2014 total of 4,357 tonnes (Chart 2). In fact, demand was as high as 4,748 tonnes in 2011.

Curiously, central banks played a major role last year, demanding 657 tonnes, versus 377 tonnes in 2017. Last year, these banks made up 15 percent of the total. They have been adding to their gold reserves.


Also last week, central banks played a major role in gold’s breakout. Both the ECB and the Fed delivered dovish messages. Tuesday, Mario Draghi, ECB president, said if inflation failed to pick up, more policy easing could be on the way. Wednesday, at the conclusion of a two-day FOMC meeting, Jerome Powell, Fed chair, seemed to have opened the door for possible easing.

Major central banks’ conventional monetary quiver does not have sufficient arrows. The fed funds rate is at a range of 225 to 250 basis points. The ECB’s benchmark refinancing rate is at zero percent and the deposit rate at negative 40 basis points.  Should there be a need for aggressive easing, they will have no option than to resort to unconventional policy. This is what gold is beginning to sense.

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