Following Thursday morning's cooler than consensus CPI report, and a hotter than expected PPI report, gold closed up ~1% on the week at a new weekly all-time closing high. The combination of large downward revisions to the April and May employment reports, an uptick above 4% in the unemployment rate, and the 3rd consecutive cooler than expected CPI report have now made it a virtual certainty that the Federal Reserve will begin reducing interest rates in September.
The Fed Fund futures market has moved the probability of a September rate cut up to 95%.
Citi believes the Fed will cut the Fed Funds Rate 200 basis points over the next year - if Citi's call proves to be correct I would not be surprised to see gold trade as high as $2,700/oz by mid-2025. Toss in the US election chaos and we are entering nirvana for gold bugs.
Gold (Weekly)
Since mid-April gold has carved out a classic bull flag pattern - this is a rectangle flag pattern with the textbook volume tapering during the recent consolidation.
Bulls will want to see volume reaccelerate on any eventual breakout from the flag.
The 2-year US Treasury yield is telling the Fed that they should have started cutting rates already. In addition, gold is telling us that real rates are heading lower over the next couple years.
The above chart has caused a great deal of consternation among gold skeptics during the last couple years. I can imagine that billions have been lost by short sellers betting that the gap between strongly positive real rates and the gold price had to close eventually. After all, the correlation between the two had been airtight over the last twenty years.
The real questions we must ask ourselves are “What is gold telling us about what is to come? And how much of what is to come is priced in at $2420 gold?”
It is with those questions that I will leave you to enjoy your weekend with gold sitting at an all-time high in nominal dollar terms.
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