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Posted by Craig Basinger on May 29th, 2023

Is the Third Time a Charm?

For the third time in as many years, gold is brushing up against the 2,000/oz zone, raising the question of whether this resistance level will hold once again or will the yellow metal finally break out. As any investor that has invested in gold or gold miners for more than a few months, it can be one of the more frustrating and sometimes mystifying holdings. The rally in 2020 was pretty logical, given the uncertainty of covid and the amount of central bank balance sheet expansion. But the languishing price in 2021 and drop in the first half of 2022 were at odds given rising inflation. More recently, bank stress has seen gold rise again to 2,000 before giving a little back in recent weeks.

Even today, many historical drivers of gold prices are at odds. The rise in nominal and real bond yields certainly augers for a lower price of bullion. As does limited equity market volatility. Yet the persistent higher inflation is supportive of a higher price, as is the U.S. dollar. Nobody said investing would be easy.

Gold is once again at resistance, so far, with no support from investors based on ETF flows

Perhaps one of the biggest swing factors that tend to drive gold price is ETF flows, aka retail. As you can see in the chart, gold often moves in tandem with gold ETF flows, both up and down over the years. Yet the recent advance has been during a period of ETF outflows. Counter the ETF outflows has been central bank buying, which set an all-time record in 2022 and continues into 2023. Perhaps the Western-imposed sanctions have encouraged many central banks to increase their reserve diversification away from Treasuries on the margin. Whatever the motivation, this has helped counter the ETF flows.

Gold Technical Take

From a technical perspective, gold is at an interesting crossroads. Over the past three years, it’s gone from a new all-time in 2020 to a prolonged consolidation period. It’s now attempted on two occasions to break through and solidly hold onto a 2000 handle. The first attempt, early last year, saw it later retrench to nearly $1600/oz largely due to a strong dollar and central banks hiking rates at an accelerated pace. Following the breakout from that downtrend last November, gold has rallied alongside risk assets to attempt a second thrust to new highs. Aided by a mini bank crisis, gold held above $2000/oz for a number of days but has pulled back rather suddenly, thanks in part to dollar strength and rising rates. The pullback has brought it back to the lower bounds of the current trend channel.

Gold prices

With the price sitting on a key support level as well as staying within the current trend channel, we see a favourable setup for a potential upside rotation back towards recent highs. For now, gold remains in a mid-long-term upside trend with an upward bias.

As the bulls and bears battle it out around key support, it appears the gold market is mired with indecision. The RSI oscillator has pulled back below 50 but is showing a mild bullish divergence which is a good sign for further rally. In addition, there is an impending bull cross on the MACD indicator. This indicates an oversold market with tiring sellers. Upside moves could find some resistance around the psychologically important 2000 level as well as the 50-day moving average at $1993. For those underweight, this is looking like a good time to begin building a position from a risk/reward perspective.

What’s Next?

Investing isn’t about trying to explain the past; it’s about the future. Do you think central banks will continue buying? We do. What about yields, both nominal and real? Well, gold has weathered yields moving higher in good fashion. They could still move higher, but most of this move is probably done. And as the Fed likely stops raising rates soon, that should turn a headwind into no-wind. Inflation may continue to come down this year, as is our expectation, but it will likely remain higher than in past years. This should continue to be a positive for gold.

Real yields - gold has weathered the rise in yields. The U.S. dollar is still pretty song; weakness should provide a boost for gold.

Then there is the dollar. We are not in the de-dollarization camp, and the U.S. dollar could see an uptick if a recession develops. Near term, that may be a headwind. Still, if the dollar is moving higher on recession, market volatility may provide an offsetting tailwind. Sorry, too much talk of wind; starting to sound like some sort of swirling vortex. Nonetheless, longer-term, we are anticipating to be dollar bears, which is gold positive.

Final Thoughts

Gold remains a stone’s throw from a key resistance level despite cooling inflation and higher yields. If a recession is on the horizon, we believe yields could tick lower and market volatility rise. Both are potential positives that could help gold finally break through this ceiling. And if retail start buying, which there have been some signs of late, this third visit to resistance may be the breakthrough gold investors have long awaited.

— Craig Basinger is the Chief Market Strategist at Purpose Investments

— Derek Benedet is a Portfolio Manager at Purpose Investments

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Sources: Charts are sourced to Bloomberg L. P.

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Craig Basinger, CFA

Craig Basinger is the Chief Market Strategist at Purpose Investments. With over 25 years of investment experience, Craig combines an educational foundation in economics & psychology with years of experience in both fundamental and quantitative research. A long-term student of the markets, Craig’s thoughts and insights can be seen in his Market Ethos publications and through his regular contributions on BNN.

Craig and his team bring a transparent and cost-efficient approach to investment management. The team provides asset allocation OCIO services and directly manages over $1 billion in assets. The team manages dividend mandates, quantitative risk reduction strategies and asset allocation services.

Derek Benedet

Derek is a Portfolio Manager at Purpose Investments. He has worked for the past sixteen years in the investment industry with experience at CIBC Wood Gundy, GMP Securities as well as Richardson Wealth. He is a Chartered Market Technician (CMT), a designation obtained through expertise in technical analyses and is granted by the Market Technicians Association. His unique investment approach combines technical analysis, quantitative finance and fundamental analysis.