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After a disappointing May start, gold could be on a cusp of a major breakout above $2,000 an ounce, according to Bloomberg Intelligence.
After falling 6.5% in the last month, gold is now near a bottom, with the $1,800 an ounce serving as a floor for prices, Bloomberg Intelligence senior commodity strategist Mike McGlone told Kitco News.
Investors have been reevaluating their risk-on positions as the Federal Reserve looks to tighten by 50-basis-points in June and June as it fights inflation.
"Gold is near a bottom and on the cusp of a pretty significant breakout — when it gets above $2,000 an ounce and never looks back," McGlone said. "One day, we're going to wake up, and gold is going to pop above $2,000 an ounce, which is resistance that will be converted into support, and never look back."
The $2,000 an ounce level has been a critical psychological resistance point for gold, which the precious metal failed to sustainably breach this year despite coming close in March.
Gold's main obstacles in the second quarter have been rising U.S. yields and a strong U.S. dollar. This is especially visible when gold's USD performance is compared to yen or euro.
"The dollar strength is putting pressure on the price of gold in terms of the U.S dollar. In terms of the yen, gold is up 20%. In terms of the euro, gold is up 15%. In terms of the U.S. dollar, it's flat. So people holding gold in Europe and Japan are performing much better. It's been a good hedge against their currency declining. It's just a matter of time before but catches up in the U.S. dollar," McGlone explained. "But once you reduce that headwind, which I think we're on the cusp of, gold should take off, and that's just based on past performance."
One of the drivers to trigger the next rally will be markets shifting gears to price the end of the Federal Reserve's tightening cycle. And that is already starting to happen, McGlone pointed out.
"This week was the first good sign that I've seen in a while. I use the one-year-out fed funds future (FF13) for hike expectations. And they are just starting to take away some of that tightening. Why are they doing it? Because the stock market has reached an inflection point of weakness," he said. "I'm looking at bond yields potentially peaking at 3% in the 10-year and the fed funds peaking around 3.4% and dropping to 3%."
The Nasdaq is already down 23% on the year. And this is helping the U.S. stock market reach that inflection point, where Fed's rate hike expectations will be reduced.
"The market is heading that way. We're at that point where the stock market going down is enough to help take the Fed's tightening out of the market and alleviate inflation and shift us back over to a deflationary environment. That's been some of the best foundation for gold in the last few years when gold bottomed in 2015 and 2018," McGlone said.
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According to McGlone, the big problem facing the Fed in the long term is not inflation but deflation. "A year from now, when you get April CPI [consumer price index], it'll be much lower, and even negative," he noted.
McGlone did note that it's an if statement. "The Fed wants the stock market down because they need to reduce the ability for people to buy stuff. And I think that's just started to happen."
Crude oil, for example, is very likely to drop to $50 rather than rise to $200. And if the U.S. stock market continues to decline, it's "virtually a guarantee" that inflation will be lower on a 12-month basis. "You want to measure inflation from a big-picture point of view — 120 months. And that's where we see bond yields decline," he said. "The base effect for inflation will go down."
In this scenario, gold will be a primary asset to go to. But when allocating to gold, it is best to pair it with Bitcoin, McGlone added.
"Looking at modern portfolios, gold is naked if not paired with Bitcoin in portfolios," he stated. "Bitcoin is becoming global digital collateral. It's a small portion in virtually all portfolios, and it's gaining momentum. I don't see what stops those trends. Bitcoin's limited supply is a recipe for higher prices unless demand or adoption declines. And I see them rising."
By Anna Golubova
For Kitco News
