The breakout in gold is looking increasingly secure.
A pullback to $2486 today has been bought and it's now trading back above $2500.
Everyone's watching China right now. On Friday, a Reuters report indicated fresh quotes for domestic banks. They had halted the quotas earlier, around the time that the PBoC stopped buying. Could the PBOC be coming back too? Despite warnings that they were now price sensitive?
While China's banks act as middlemen between investor demand and jewellery demand, the current surge has been driven by investors. The situation in China is critical to understanding this rally. With a weak economy, Chinese domestic investors have lost faith in property and equity markets. They can't easily move their money out of the country, and the currency is falling. So gold is one of the few alternatives that are working and demand is tough to meet; it's the main driver I gold's rally.
The Lack of Fanfare
What's particularly interesting about this new all-time high is how little attention it's receiving. Gold is outperforming equities and the rest of the commodity complex, yet there no one seems to have noticed. There is a tough battle for attention right now if AI wasn't such a gamechanger and volatility wasn't so high but I would be less bullish on gold if it was on the front page of CNBC every day.
Fed Policy and Dollar Dynamics
The fact that gold has breached $2,500 before the first Fed rate cut is significant. I believe gold still has a long way to go. The last leg of the gold rally will likely be driven by a declining US dollar, though the timing is uncertain. I'm encouraged though by the USD softness since last week's retail sales-driven pop.
Eventually though, congress will cut back on US spending and high rates will bite. That might take until 2025 or 2026 when Congress finally addresses spending cuts but it will come eventually and will be a tailwind for gold.
Powell's Jackson Hole Speech
This Thursday is Fed Chair Powell's Jackson Hole speech; I don't expect any major surprises. The messaging has been clear that they're preparing to cut rates. Look for generally dovish comments suggesting they have improving confidence on the path of inflation. A risk is that Powell stomps out any 50 bps pricing but I think they prefer to keep options open if nonfarm payrolls data comes in weak.
Is it too early to start talking about $3000?
