Gold is Waiting for a Go Light to Rally

Gold prices are rising by 0.9% to $1990 per troy ounce this week. Impressive, but not impressive enough to climb to $1997 per ounce, the high of the last week. This is also not enough to hit the resistance at $2000-2020 per ounce.

Gold prices are being dragged by multiple diplomatic efforts of the international community to fix-up Israeli-Palestinian conflict. Macroeconomic data routine and corporate earnings reports in the United States are also weighing on gold prices. The latter had no major effect so far, but it may soon change after risks of the expansion of the Middle East conflict would be tamed. 

PMI readings in the United States both for service and manufacturing sector came out above 50.0 points signaling an expansion of business activity. This mean an increasing risk of another possible interest rates hike by the Federal Reserve (Fed). Atlanta Fed estimate that the U.S. GDP in the Q3 2023 will hit 5.2% YoY. This is a very strong figure, very far from a recession that is much feared by the investment community. This is also bad news for gold, as Treasuries yields may continue to rise generating excellent investment opportunities. 

The choir of recession fears adepts sounded louder when the inversion curve between U.S. 10-year and 2-year Treasuries yields started to be un-inverted. This is a 100% signal of the nearing recession and stock market decline. In this case gold prices will fall to as investors need to cover their positions in stocks by selling gold. This historically led to a 25-30% drop in gold prices and their recovery in the following 2-3 years to new all-time highs. Thus, the risk of the recession in the United Stated must not be downplayed. It will certainly affect gold prices to the downside at some point. However, it will likely happen after the Middle East conflict will be muted. All this does not exclude a possibility of another upside wave for gold prices. They may even pass the resistance at $2000-2020 and move further to $2100 per ounce. 

Meanwhile, Israel’s forces has intensified shelling of the south of the Gaza strip. Israeli Prime Minister Benjamin Netanyahu said that war on the Gaza Strip may take a longer period of time. He also promised that a ground incursion into Gaza was coming soon. Wall Street Journal reported that U.S. Administration asked Israeli authorities to delay ground operation in Gaza strip so that Pentagon could cover U.S. troops in the region by air defenses. This may require some time, but not more than two weeks. So, gold prices above $2000 per ounce could become a reality very soon. This scenario could be also confirmed by capital flows into the SPDR Gold Trust (GLD) ETF, where capital outflows of $202 million were reported for the last week. The Trust has reported inflow of $70 million only during the last eight weeks. This indicates that investors are very serious about recession in the United States. These risks are certainly outweigh other issues, including geopolitical agenda. Thus, the likely scenario is a spike of gold prices followed by a huge drop of them.