Gold Price Forecast: Expect New Highs and Strong Breakout Above $2000

The Fed likely has one or maybe two more rate hikes before they pause in the second quarter. 

The US must raise the Debt ceiling before July to avoid a technical default.

Bank lending standards approach recessionary levels supporting widespread weakness.

Fed Update 

Powell spoke last Friday, explaining how their actions may be viewed as unpopular over the coming months as they hold fast to keep rates higher for longer. He vowed to resist any political backlash. 

I believe Powell understands that if he cuts rates too soon, consumer spending will rebound, and inflation will come roaring back. That is precisely what happened in the 1970s when Author Burns cut too quickly. 

What could cause Powell to deviate from “higher for longer” and cut rates sooner? I think it would take another global crisis, core inflation dropping below 3.0% for several months, or unemployment soaring above 5.0%. I don’t see any of those happening in the first half of 2023. 

Technical Debt Default 

According to Secretary Yellen, the Treasury Department has begun using special measures to avoid a payments default. Last week she stated the debt ceiling would need to be raised by June or July to avoid a technical default.

It’s hard to say what problems the world may face in five months, but if politics stay status quo, it’s reasonable to assume raising the debt ceiling may be challenging. After all, it took 15 votes to elect Kevin McCarthy as Speaker of the House…if that’s any indication. 

Banks Tightening Credit Standards

One sign of an impending recession is when banks start raising credit standards. Currently, 31.8% of domestic banks have tightened credit standards on Industrial Loans and Small Firms. Any reading above 40 (red arrows) foreshadows a recession. We are very close and could breach that level soon.

Gold Update 2023

Last year was awful for precious metal investors. After being down most of the year, gold finished flat despite soaring inflation, a war in Ukraine, and collapsing equity prices. The main driver behind gold’s poor performance was exploding interest rates and aggressive Fed tightening. Those forces are abating, and gold should do much better in 2023 and 2024. 

Ultra-Bullish Scenario

One scenario I’m considering is an accelerated bullish rise over the next few months that catches retail traders sleeping. Sometimes this happens at significant market turning points when gold is severely under-owned. 

The psychology behind the ultra-bullish scenario: Retail traders were burnt out and frustrated with gold last year, understandably so. Many jumped out near the September lows and have been sitting on the sidelines. Now that metals and miners are beginning to perform, they may be looking for a generous pullback to get back in. 

In situations like this, sometimes, the pullback never comes, is shallower, or happens faster than they expect. Prices grind higher day after day. The relentless rise becomes too much, and retail investors jump back in…usually at a near-term top.

Note: I don’t know if this scenario is happening, but it’s on my radar. Currently, I’d give it 25% odds.

GOLD CHART

Gold keeps chugging higher despite overbought conditions. For more upside, prices need to close above $1950 - whereas finishing below $1900 would promote a pullback. 

GOLD MINERS (GDX)

Miners are overbought, and I see two possibilities for the rest of January. 

1) Prices pull back into late January ahead of the February 1 Fed meeting. 

2) Prices keep grinding higher without a meaningful pullback.

Progressive closes below $31.00 would support the first scenario. Whereas a sustained rally above $33.00 would promote the second.

Outlook Summary

Gold bottomed in late 2022 and began a new 18 to 24-month uptrend that should extend into mid-2024. Gold is expected to breakout above $2000 in 2023, perhaps aggressively, and should reach new all-time highs as retail interest returns.

********