Gold has risen 20% in just two weeks, but last Friday it fell by 11.4%, its worst single-day drop in nearly 50 years. Though it has rebounded this week, the bull seemed weak.
Is the bull market of gold over?
1. Why Did the Gold Price Keep Rising?
Many people know that the gold price is negatively correlated with the USD, but few know that it is also negatively correlated with the inflation-adjusted real yield of US Treasury bonds. This is because both gold and Treasuries are safe-haven assets. If Treasury yields are high, why would people buy the more expensive gold? The real yield is gold’s opportunity cost.
Many investors focus solely on the Fed’s policy rate, assuming that higher rates negatively impact gold. However, if inflation remains high, the real yield can still be low, making gold a more attractive option.
2. Why Did the Gold Price Collapse?
Kevin Warsh, the next chairman of the Fed, is more cunning than Jerome Powell. Everyone knows Trump was angry with Powell because he is very cautious on rate cuts, but Warsh agrees with Trump that the rate should be cut more quickly. On the other hand, he shall also be cautious about the inflation rate.
So he has to shrink the balance sheet before cutting rates.
But why does Trump want to cut rates so eagerly? The US government now has a budget deficit of $145 billion, which is 67% higher than last year. This is why Trump wants to cut the rate because the burden is too much to bear.
Shrinking the balance sheet will lower the inflation rate before he cuts rates, so the real yield of the Treasury will be higher. The gold price falls as the opportunity cost of gold is higher.
3. Is the Bull Market of Gold Over?
The answer is YES if Warsh puts this policy into an action.
According to Wyckoff, the bearish bar last Friday is a SOW (Sign of Weakness), which indicates a distribution on the top. When the price drops sharply, buyers will inevitably come in and make it rebound, but a rebound doesn’t mean the bull market will continue. There is a strong level of resistance at $5,600. If the price cannot break through $5,600, it will drop again and form a trading range.
Will the price successfully break through $5,600 or drop below $4,400, the bottom of the trading range? I don’t know yet. We shall see.