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The sentiment in the gold market has reached its "maximum disdain," which means that gold is primed for a reversal and could be ready to rally past $1,900 an ounce, according to Bloomberg Intelligence.
As the Federal Reserve gears up to raise rates and reduce liquidity, the precious metal is a potential top performer this year, said Bloomberg Intelligence senior commodity strategist Mike McGlone.
And after a year of consolidation, gold has formed a solid price bottom at around $1,700 an ounce.
"The elongated stock-market rally, recent commodity bounce and competition from Bitcoin may have pushed the metal close to maximum disdain, solidifying gold's foundation vs. the 'there's no alternative' mantra," McGlone said in a report. "We see gold-bottoming parallels to the 2008 and 2018 foundations."
Gold's potential upside stems from the Fed's hawkish stance to fight inflation as the U.S. stock market gives up last year's gains.
"The fact that gold responded well when the Federal Reserve started the last rate-hike cycle in 2015 -- and when it ended in 2019 -- may favor the metal in 2022. Not since the 2008-09 financial crisis has the one-year-out fed-fund future priced for a similar extreme disparity of higher hikes as now. This dichotomy about 14 years ago coincided with a gold foundation of around $800 an ounce, on the way to the 2011 peak just above $1,800 -- near the current price," McGlone explained.
All eyes are on the Fed's March decision, with the CME's FedWatch Tool pricing in a 92.5% chance of a 25-basis-point rate hike. If all goes according to plan, gold might be looking at a similar launchpad as December 2015, when gold rallied from $1,000 an ounce to above $1,300 an ounce within just six months.
"Gold is a prime candidate to follow the pattern of commodities that trade within narrowing wedge patterns -- they have a tendency to break out to the upside. The 2021 range of about $1,700-$1,950 an ounce roughly matches the 50-week Bollinger bands, which are the narrowest since 2018," McGlone stated. "About $1,700 is a solid base for a potential breach of $1,900 resistance."
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Gold is "a primary beneficiary" in response to the Fed's fight against four-decade high inflation. Other assets with a similar outlook are U.S. Treasury long bonds and Bitcoin. In the meantime, the U.S. stock market is looking at a significant reversal of 2021 gains, Bloomberg Intelligence added.
"The remainder of the year faces the potential for some sustained reversion of the about 600% advance in the S&P 500 since the 2009 bottom. The Federal Reserve fighting the highest inflation in about four decades and full employment suggest the party is over. If commodities, equities and bond yields don't reduce liquidity and revert some of the inflation-related advances of 2021, it's more likely the Fed will," McGlone said. "If the SPDR S&P 500 ETF Trust (SPY) continues to wobble, we see greater potential for gold, long bonds and Bitcoin to top the performance scorecard toward the end of 2022."
Gold is wrapping up January down almost 1.7%, trading very close to its key psychological level of $1,800 an ounce. February Comex gold futures were last trading at $1,796.80, up 0.67% on the day.
In the meantime, the S&P 500 is closing January down more than 6%, marking the biggest one-month decline since March 2020.
By Anna Golubova
For Kitco News
