Image Source: Pixabay

Just two months into the year, gold (GLD) has left other asset classes in the dust, delivering impressive returns. However, after its explosive start, a short-term pullback or consolidation may be on the horizon before the yellow metal makes its next attempt at the $3,000 per ounce milestone.

Bob Farrel’s Rule #7: A Lesson for Gold Investors

Bob Farrell, a Wall Street legend with over 50 years of experience at Merrill Lynch, created ten investing rules that have stood the test of time. One of the most insightful is Rule #7:

“Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.”

Although Farrell originally applied this to the stock market, the principle can also help identify turning points in gold.

In stocks, a broad rally involving many companies signals a strong and sustainable trend. However, when only a handful of stocks drive the market higher, the rally becomes vulnerable to a pullback. The same concept applies to gold:

• When gold rises against nearly all world currencies, the rally is strong and sustainable.
• When gold is only climbing against a few weak currencies, a pullback or correction may be imminent.

Gold’s Recent Weakness: A Sign of a Short-Term Pause?

I track gold’s performance against 31 world currencies, from the last five days to the past year (see table below). Over six months to a year, gold is up against all 31 — signaling a very strong and sustainable trend. But zoom in over the past week and we now see across-the-board weakness against every currency, which could be sending an important message.

Gold Relative to Foreign Currencies 

(Click on image to enlarge)

Source: Financial Sense Wealth Management, Bloomberg

The widespread nature of this short-term weakness could indicate a potential pullback, or at best, a consolidation phase where prices stabilize before resuming their upward trend. A drop below gold’s 20-day moving average, currently at $2,889, could confirm a temporary peak. Gold hasn’t fallen below this level since early January and breaking it might lead to a decline toward its 50-day moving average at $2,760. However, if gold stays above $2,889, its uptrend from the start of 2025 remains intact, keeping $3,000 within reach.

Why Gold’s Big Picture Still Glitters

Despite the near-term weakness, I believe the longer-term outlook for gold is still bright. Three weeks ago, the World Gold Council reported that global gold demand hit a record 4,974 tons in 2024, driven by central banks snapping it up. Since 2001, these banks have been shifting away from the U.S. dollar and toward gold.

Back in 2001, the dollar made up 72% of global currency reserves, and gold was under $300 an ounce. By 2011, as the dollar’s share dropped to 61%, gold soared near $2,000. Then, from 2011 to 2016, the dollar rebounded to 66%, and gold fell by half. Since 2016, though, the dollar’s share has sunk to a 30-year low, while gold has hit all-time highs.

Gold vs US Dollar Holdings in Foreign Exchange Reserves 

(Click on image to enlarge)

Source: Financial Sense Wealth Management, Bloomberg

President Trump’s push for a weaker dollar to boost U.S. manufacturing and reduce the trade deficit add further fuel to this trend. Global demand for gold isn’t likely fading over the months and years ahead. If gold does pull back, it could be a golden chance for long-term investors. The big-picture forces — central bank buying and a fading dollar — suggest this bull market still has room to run.

More By This Author:

DOGE: Less Thinking And More Doing
Big Tech No Longer Dominating, New Leadership Underway
Time For A Strategic Shift