Gold: Where Will It Go After This Record-Breaking Run?

Subscribers to Chart of the Week received this commentary on Sunday, April 7.

All eyes and ears are unwaveringly on Federal Reserve Chair Jerome Powell’s every move, eager for any morsel of information about interest rates. This past week, Powell spoke at Stanford University, sharing the Fed will more than likely lower the benchmark interest rate in the latter-half of the calendar year. While inflation did gain traction in January and February and many investors are worried the impending presidential election would impact timing, Powell shot down the concerns, brushing them off as unworthy of continued conspiracy.

Yet on Thursday, Minneapolis Fed President Neel Kashkari noted "If we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all." To further convolute the dynamic, Fed Governor Michelle Bowman on Friday went the other way, noting interest rates may have to be hiked to combat inflation. The lack of consensus from the central bank did a number on bond yields, with the 10-year Treasury yield last seen at 4.37%. The fallout from the bond yield spikage is not only a rough week for U.S equities, but also an extended runway for safe-haven assets like gold.

As the Fed see-saws and weighs the stream of economic data SPDR Gold Shares (GLD) have made extreme moves to the upside, outpacing the broader market trends. Now Up 12.7% year-to-date, the shares are climbing above the SPDR S&P 500 ETF Trust’s (SPY) 8.7% for the same time frame, and don’t look to be slowing anytime soon.

Gold futures for March turned in an 8.4% leap, the commodity’s best monthly performance since July 2020. The precious metal has enjoyed six consecutive fresh record highs, and are now forming a cup and handle pattern on the monthly chart with the 1,000-month moving average -- which tends to precede a bullish shift. Even further, it has taken out the level that is twice its 2016 lows at the round $100 mark and just last night saw its Initial and Maintenance Margin requirements lifted overnight by the Chicago Mercantile Exchange (CME).

It’s hard to imagine what to expect in the coming months for gold, as surely it must be approaching its top. But this may not necessarily be the case when looking at six month returns and wider, as per data pulled by Schaeffer’s Senior Quantitative Analyst Rocky White. Gold has gained at least 7.5% in one month, when compared to higher monthly returns since 1990. Typically, this has led to poor returns for gold over the short term. The next month has averaged a loss of 0.92%, with just 38% of the returns positive. The three-month returns are also bad, but it gets better at the six-month mark, where returns resume to being similar to other years and 12-month returns even outperform slightly.

Until the Fed moves definitively in one direction, market activity will be anything but docile. The appeal of jumping aboard outperforming safe-haven assets for the long term will be hard to resist, especially when you factor in just how influential the incoming election season will be and the crescendo it will build to from summer to fall. Keep an ear to the ground and stay close to GLD’s highly liquidated ETF peers VanEck Gold Minters (GDX) and iShares Gold Trust (IAU), as a diversified portfolio is almost always a good idea, especially with so many outside factors looming large.