Summary
Highlights
Gold typically rallies at the start of the year, consolidates by April-May, and then moves into a strong rally in the second half. Current patterns suggest a similar setup for a monster second-half rally. This is further supported by a World Gold Council survey indicating that a record 45% of central banks expect to increase their gold reserves in the next 12 months. Additionally, low speculative positioning and extreme put-call skew suggest a potential squeeze higher.
Gold is currently underowned and undervalued relative to its implied level based on the federal funds rate. Machine positioning (Bank of America CTAs) shows no sell signals, with the next buy signal at 451. Fund managers are increasingly viewing gold as undervalued, with the net percentage saying it's overvalued plunging to its lowest since February 2024. This sentiment shift has historically preceded significant gold rallies.
The 2:10 year yield curve is signaling a major policy mistake by the Fed, which historically precedes gold rallies. An inverted curve, where short-term yields are higher than long-term yields, indicates tightening financial conditions and has consistently preceded recessions. The Fed's inclination to hike rates while 10-year yields remain stagnant will likely exacerbate the inversion, forcing the Fed to cut rates, which is bullish for gold.
Banks tightening lending standards, a consequence of an inverted yield curve, pressure the Fed to cut rates. Historically, every time the yield curve inverted, the Fed responded by cutting rates to fix the inversion, rather than hiking. This contrarian view suggests that despite current market expectations of Fed hikes, an eventual rate cut due to tightening financial conditions will strongly support gold prices.
The biggest risk to the bullish gold narrative is a rising dollar. However, if the dollar's recent surge proves to be a bull trap and it falls, it would confirm the bullish case for gold. For gold (GLD) to rally, it needs to close above its 200-day moving average and the six-month volume profile, which would trigger a bear trap, squeezing short positions. The long-term strategy involves moving from equities to gold and then to bonds as financial conditions evolve.