Gold Price Rally Will Resume After Building 1999-Like Foundation, Watch USD-EUR Disparity, Bloomberg Intelligence Says
(Kitco News) Gold is building a foundation similar to that established in 1999, and once that price base is established, gold’s rally will resume, according to Bloomberg Intelligence.
The low price set in 1999 at around $250 was so strong that gold never went back below it again. And Bloomberg Intelligence’s senior commodities strategist Mike McGlone sees a similar pattern developing in 2022. McGlone indicated that US dollar gold versus euro gold and the Japanese yen is something to watch. from close.
“The disparity between dollar-denominated gold and euro-denominated gold is approaching levels that provided a sustainable base for metal prices in 1999. Down about 10% in 2022 as of September 28, gold in dollars compares to respective gains of 5% and 10″. % for the euro and the yen,” McGlone said. “Aggressive Fed tightening to combat inflation and high asset prices – which are supporting the greenback, as the rest of the world tries to catch up its late – echoes the trends of about two decades ago. The fundamentals are firming up for the price of gold to resume its rally that started with this base.”
Global GDP falls dramatically after central banks synchronized their rate hikes in the global fight against inflation. But eventually, there will be a reversal.
“Gold’s rise on a non-dollar basis shows the kind of stress that could break the Federal Reserve’s rate hike path,” McGlone noted in his October metals outlook. “The relative discount of the dollar-euro spread on gold shows monetary distress and suggests a potential catalyst for a bottom in gold – an easing of Fed rate hike expectations.”
And as soon as there is any sign that the Fed is ready to ease, it would be the perfect time for gold to return to its rally mode.
“Aggressive Federal Reserve tightening is a major headwind for the price of gold in 2022, and if past trends are a roadmap, that too will pass. The key question may be when,” added McGlone. “It makes sense that the price of gold in dollars will fall by around 10% in 2022, with the broad trade-weighted dollar index rising at around the same level, but most scenarios can favor a recovery of an enduring appreciation of the metal.”
One of the main triggers that could force a reversal or pause in Fed tightening is a continued decline in the US stock market. “We expect the Fed and central banks to be successful in mitigating inflation, and see the risks swing to a prolonged deflationary period, which may favor gold,” McGlone explained.
Meanwhile, base metals are looking at a lose-lose scenario, with prices set to fall further, the Bloomberg Intelligence report pointed out.
“A roughly 12% year-over-year decline for the Bloomberg Industrial Metals Index may be insufficient, particularly if the fall in global money supply is any guide,” McGlone said. “Industrial metals bottomed out with an annual decline of around 60% during the financial crisis, which was more US-centric. Commodities are global and the most central banks in history to rising rates, and liquidity falling at a faster rate than in 2009, may portend a similar outcome for copper and base metals.”
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