Gold Bugs Big Day

The front-month gold future contract reached $2,300/ounce this week, a new all-time high and a gain of 11 percent since the start of the year. To put things in perspective, if you pull up a monthly chart of gold you can see a steady climb in value from the early 2000s that accelerated in 2008 after the home mortgage crisis and the government bailout packages that came with it.

Prices peaked in the fall of 2011 at just over $1,900/ounce. The price decreased from there over the next two years to trade a range between $1,370/ounce to $1,050/ounce for the next six years, before breaking out above $1,400/ounce in July of 2019 and then once again accelerating in early 2020 amidst the Covid outbreak and unusually large government spending that followed. August of 2020 saw gold trade above $2,000/ounce for the first time, at which point it stopped and traded a wide sideways range between $1,660/ounce and $2,050/ounce until breaking out to the upside last month.

While the two examples of the mortgage crisis in 2008 and Covid in 2020 are dissimilar, in many ways they share enough similarities to draw comparisons.

The timing of this recent breakout higher is perfect in the kind of way that allows for an equal number of traders on both sides. The bullish case is that this move is potentially the start of a new leg higher, that will inevitably lead to another trading range at higher prices once the temporary highs are achieved. The bearish case is that this could be the last surge higher, running off the fumes of Covid inflation with the risk of a bigger downturn in prices below the $1,660/ounce level.

The odds seem to favor the bull case right now. Re-inflation worries, along with a Fed board that is no longer as confident in cutting interest rates but may still feel pressure to do so, are two of the key fundamentals behind the move. Technically speaking, the longer prices stay above $2,000/ounce, the harder it is going to be to argue the bear side.

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