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How Long Can Gold Prices Keep Rising?

Between interest rates approaching record lows, the de-linking of the Swiss franc and the euro, and the ongoing deterioration of crude oil prices, it’s likely you didn’t notice gold prices jumped sharply on Thursday, bolstering an underappreciated rally that’s been in place for nearly two months.

All told, the SPDR Gold Trust (GLD) has gained 10% since its November 5 low, and though Thursday morning’s gap is apt to spur a little bit of a bearish pushback, the new uptrend is rather well-developed.

What’s really most remarkable — and perhaps telling — about the gold price advance isn’t the size and scope of the gain, however. What’s so amazing about gold’s budding bullishness is that it’s unfurling in an environment that is usually anything but bullish for gold prices.


Is the rally a prediction of what’s about to change on the economic landscape? Or, are gold prices poised to fall again, sharply and soon?

Why the Gold Price Trend Heated Up on Thursday

Though gold prices have been rising since early November, yesterday was one of the biggest single-day moves we’ve seen from the world’s most-loved commodity since the uptrend began.

That strength was spurred by news that Switzerland had decided to remove its currency’s static link to the euro. The result was a sharp pullback in the euro’s value, which may have been as much about economic disruption in the region as it was about the ripple effect of newly-free-floating exchange rates between Switzerland and its neighbors.

A weak euro, in turn, can strengthen the U.S. dollar, which can … you get the idea. It’s disruptive, and potentially dangerous. Inasmuch as many investors feel gold is the only true defense against a global currency implosion, demand for the metal perked up.

Whether or not the defensive measure was necessary remains to be seen, although odds are it wasn’t. That’s not the question so-called gold bugs should be asking themselves, however. What’s much more prescient at this point regarding gold prices is, why has gold managed to make gains when it really shouldn’t be, and how long might the odds be defied?

Not Quite Right

The most common reasons given for an increase in gold prices are (in no particular order):

  • Threats of rampant inflation
  • The U.S. dollar is losing value
  • Heightened geopolitical turmoil
  • Supply is limited
  • Falling interest rates

With those reasons in mind, the recent gold rally starts to make very little sense. Interest rates are falling, to be sure. The yield on  30-year Treasury Bond now stands at 2.411%, which is a record low. One could also make a reasonable case that geopolitical tension is slightly above average right now, although even that would be a bit of a stretch.

Meanwhile, the U.S. dollar is anything but weak, with the U.S. Dollar Index at multi-year highs. The inflation beast has been more than tamed, with the annualized inflation rate last seen at 1.32% and still trending lower. And the World Gold Council has reported that gold supply has outpaced gold demand in four of the past five quarters through the third quarter of last year.

US Dollar vs. 30 Year Treasury Yields

In other words, by most accounts, gold shouldn’t be on the rise unless the decline in interest rates is overpowering all the other dynamics that normally work against gold prices.

With all that in mind, there are only two possible interpretations of the fact that gold prices are rising against the tide: Either all these buyers are nuts, or all these buyers see a major reversal of some key trends that nobody else sees coming.

Bottom Line for Gold Prices

Prognostications and the folks who make them are a dime a dozen, so take any predictions with a grain of salt (including this one). But, being as realistic as possible, rising gold prices are the market’s indirect way of saying the current economic scenario is due for a change soon.

It’s not a bad bet, either. While the U.S. dollar is rising like a rocket, it has reached the point where it’s so expensive against other currencies as to stifle international trade. Indeed, exports have already begun to slow considerably as the ascension of the greenback’s value heated up in September … and exports were already cooling off before then. That slump will create the conditions that reel the dollar back in sooner than later.

US Exports Through November

Simultaneously, the Federal Reserve has already acknowledged the current inflation rate is well below its target rate of 2%. While there’s no immediate fix for tepid inflation in the Fed’s bag of tricks, the fact that they’re talking about it at all suggests that a concerted effort to pump up the number is in the works.

As for yields, while there’s not apt to be much more room for lower interest rates, it’s also unlikely that rates are going to rise sharply any time soon. The absence of rising rates may be enough to let gold prices continue to rise, spurred by the other four key factors.

With all of that being said, traders should know that while all the key trends for the dollar, yields, and inflation are near turning points that should work in favor gold prices, the bigger, structural dynamics working against gold have yet to shift. In plainer terms, this gold price uptrend is most likely only going to be a reactionary, short-lived trend.

The longer-term trends are still ultimately working against gold prices. A move back to $1350 per ounce would be a good first “checkpoint” target, and if no ceiling develops there,  a move to $1480 would likely be all this rally is capable of doling out before running out of gas. A key Fibonacci retracement line sits at $1445, underscoring an area that’s a potential point of contention.

gold futures

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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