Don’t bet against it, but can gold keep fighting the Fed?

(Kitco News) – There are very obvious reasons why gold prices are ending the week consolidating around $2,400 an ounce, a new record weekly close for the precious metal; however, this unprecedented rally has broken long-held fundamental correlations, and the question investors should be asking is if this is the start of a new paradigm shift or can we see a reversion to the norm.

Gold continues to benefit from geopolitical uncertainty as chaos reigns in the Middle East; at the same time, it is an attractive safe-haven asset as equity markets struggle to maintain their bullish momentum near record highs; the yellow metal can also help consumers protect their wealth and purchasing power as fiat currencies struggling under the weight of burgeoning debt levels.

I might have missed a few points, but those are the critical pillars of support for the gold market. 

However, gold is also a non-yielding asset, so in an environment of rising bond yields, it can be expensive to hold, referred to as opportunity costs. The global gold market is also priced in U.S. dollars, so the higher the greenback trades, the more expensive gold becomes.

This is a fairly simplistic description of the tug-of-war battle waged in the gold market. Interestingly, these factors have been fairly balanced, and it’s only been in the last two months that the market has skewed to one side.

In a world of uncertainty, investors are paying little attention to the opportunity costs of the precious metal as they look to protect their portfolio and purchasing power. But can this trend continue?

We are seeing signs that gold’s momentum, at least for now, is weakening. The conflict in the Middle East is not going away as Israel and Iran wage tit-for-tat military strikes against each other; however, the threat has not escalated and drawn in other major world powers. Tensions have not eased, but they have at least stabilized, and this could remove some safe-haven demand for gold, which could put renewed focus on the Federal Reserve’s monetary policy.

This week Federal Reserve Chair Jerome Powell surprised markets with a brief hawkish comment. While speaking at an event in Washington, D.C., Powell said that after the release of hotter-than-expected inflation data, the central bank has less confidence it is ready to cut interest rates. A June rate cut is basically off the table, and markets only see a 50/50 chance of a July rate cut.

Gold investors didn’t even blink at this comment as the market consolidates in rarified air.

However, there could be some investors who, after hearing these comments, are ready to take some of their gold profits off the table. Investor sentiment from the Bank of America Fund Manager survey suggests that gold is overbought.

While I don’t know how long the gold market can continue to fight the Fed, history also shows that it’s not wise to bet against the yellow metal. 

According to a growing chorus of analysts, a brief consolidation period through the summer could create a positive environment for gold. When it’s clear the Fed has no choice but to lower interest rates, that is when we could see the next leg of what is expected to be a protracted bull market.

That’s it for this week. Have a great weekend.