Gold Hits Record $2600; Analysts Eye $3336 Next

The Federal Reserve began its anticipated easing cycle this Wednesday, cutting interest rates by 50 basis points.

The Fed also anticipates a further 0.5 percentage point rate cut before the end of 2024, with the world's most powerful central bank having two policy meetings left to do so.

The Fed's "dot plot" indicates that by the end of this year, 19 members of the Federal Open Market Committee (both voters and non-voters) believe the benchmark federal funds rate will be at 4.4%, equivalent to a target range of 4.25% to 4.5%.

The central bank's remaining two meetings for this year will take place after the November 5th U.S. election, scheduled for November 6th to 7th and December 17th to 18th.

The market cheered as stocks and gold trading both hit historical highs following the U.S. central bank's formal capitulation to inflation that remains well above its mandated 2% target.

Despite inflation "still edging up," the Fed's statement indicated that "in light of progress in inflation and the balance of risks," policymakers chose to lower the overnight rate to a range of 4.75% to 5%.

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The significance of this move should not be underestimated, especially considering that just ten days ago, traders believed there was an 18% chance of a half-percentage-point rate cut.

With inflation still well above the Fed's mandated 2% target, a more substantial rate cut confirms the central bank's belief that the economy is in trouble.

The yield curve indicates that the Fed had no choice but to cut rates significantly.

The recent positive turn of the U.S. 2-year and 10-year Treasury yields for the first time in two years during the week of September 9th, when they entered the Federal Open Market Committee (FOMC) control period, has intensified concerns about an economic recession.

When the inversion began, it was a key macro signal historically indicating weak future growth.

This chart shows that this is the inversion the Fed is closely watching, signaling the start of an economic recession, rather than the initial inversion when the central bank began raising rates from zero in the first quarter of 2022.

Historically, non-inversions have signaled the start of an economic recession.

With the Fed keeping rates stable at the 20-year peak of 5.25%-5.50% since October, gold prices have experienced historically unprecedented volatility over the past four quarters.

The safe-haven metal has risen 45% from around $1,800 and has set 35 historical closing highs so far this year.

Historically, precious metals have never set new highs in such a short period of time.

With only six trading days left in the third quarter on the New York Mercantile Exchange, gold futures are highly likely to close above $2,600 on a quarterly basis.

As the New York Mercantile Exchange closed for the day, spot gold fluctuated during Powell's 50-minute press conference on Wednesday, setting a new intraday and historical high of $2,600 per ounce before the "sell the news" reaction pulled prices back to $2,557, while the U.S. dollar hovered below the key multi-year support line of $100.

By Wednesday evening, a day after the second explosive device occurred, Israel bombed southern Lebanon, and gold prices immediately fell.

The country's security services also said on Thursday that they arrested an Israeli citizen last month for alleged involvement in an assassination plot supported by Iran.

Hezbollah, which has a large number of missiles, has vowed to retaliate against Israel.

Safe-haven buying hit Comex gold futures traders, pushing the price back above $2,600 on Thursday morning.

With the precious metals sector rising alongside the stock market, the market chose to focus on dovish global monetary policy without showing a stronger safe-haven sentiment in response to escalating geopolitical tensions in the Middle East, Eastern Europe, and the South China Sea, which is somewhat surprising.

Not to mention the increasingly chaotic U.S. election on November 5th.

Now that the Fed has officially reversed its monetary policy, and with no signs that the U.S. government will back down from its trillion-dollar deficit, the additional prospect of simultaneous escalation of wars in these three regions is keeping gold in good prices.

Simply put, after the historic 13-year cup and handle breakout in March, gold is in a bull market and is therefore likely to rise.

The speed of this move will depend on the degree of war escalation, Fed rate cuts, and the chaos of the U.S. election heading into the fourth quarter.

Gold futures cup and handle technical breakout targets are $3,000, with the next Fibonacci target at $3,336 after reaching the first major Fibonacci target of $2,461, based on the depth of the 2011-2015 correction.

On the downside, a drop in gold prices below $2,500 would be troublesome, while a drop below $2,300 could indicate that the uptrend has ended.

Bullish macroeconomic fundamentals and intermediate technical indicators suggest that gold may be preparing for a steady move towards $3,000-$3,300 before a long-term correction occurs.

Meanwhile, gold stock ETFs have been optimistically capping the recent sharp rise at strong resistance levels for years this week.

GDX has been consolidating near the 4-year resistance level of $40, while GDXJ is also consolidating near the near 3-year resistance level of $49.

This afternoon, the weekly closing price of New York Mercantile Exchange gold futures above $2,650 will break through two key resistance levels, with a target of GDX reaching $50 and GDXJ reaching $60 by the end of the year.

Since mid-June, as gold stocks continue to quietly outperform the S&P 500 with low trading volume, the HUI:SPX ratio has broken through a 1-year inverse head and shoulders bottom.

Since the surge from the COVID-19 pandemic-related low in March 2020, due to multi-talented chasing bubble valuation high-priced stock trading, the average trading volume of GDX and GDXJ has been halved.

In the past two months, trading volume on the Canadian TSX Venture Exchange, which includes 50% of junior gold stocks, has been at an all-time low.

The bad news for junior speculators is that the trading volume of miner ETFs is still not enough to indicate that retail investors are entering the industry, as they continue to buy weak common stocks and cryptocurrencies.

The good news is that silver and miners have been leading the gold price break above $2,500, while top-tier junior miners continue to outperform the market.

In addition, gold miners will announce a surge in earnings for the third consecutive quarter in the earnings season in November, which will greatly attract generalist funds back to the mining industry, as most funds exited more than a decade ago.

With another excellent earnings season expected, we need to see trading volume rise when GDX breaks through the 4-year rigid resistance level of $40, while the gold/silver ratio tends to below 75.

As silver and miners continue to outperform gold, investors seeking greater leverage on gold prices will turn to the riskier junior sector.