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When the market realizes that global inflation will persist even if monetary policy is tightened, the spot gold price (XAUUSD:CUR) will rise to $2,500 per ounce. Despite a short-term recovery in the Consumer Price Index (CPI), the economy is facing extreme inflation, which does not resolve the economic and financial turbulences. Higher inflation expectations will eventually benefit the precious metals market. On the other hand, the U.S. dollar is expected to fall further due to strong bearish patterns, which is an added advantage for the gold market.
Technically, the gold market has been consolidating between $2,075 per ounce and $1,680 per ounce for the past 29 months. On long-term charts, this consolidation has been regarded as price compression, and any breakout from this range will be viewed as the next strong move. In my opinion, the breakout will happen to the upside due to higher inflation, a weaker dollar, and geopolitical risks. The market is trading above the inflection point of $1,680 per ounce, with 2021 and 2022 as yearly inside bars. Therefore, $1,680 is considered a strong buying opportunity in gold market for long-term investors.
The chart below shows the percentage change in the CPI for all urban consumers from a year ago for all items in the U.S. city average for past five years. The CPI increased by 7.1% in past 12 months, while the core CPI increased by 6.0%. However, there was slight drop in the CPI in the last three months. The drop in the CPI affected the market due to the expectation of lower inflation, which resulted in a sharp decline in the 10-year Treasury yield, followed by a retracement to test resistance at 3.5%. Energy price inflation also fell by 65.09% from June 2022 to November 2022, resulting in a 34.018% decrement in the CPI.
Similarly, the CPI index for sticky prices also fell slightly to 5.7% within last three months. The lack of progress with sticky inflation is largely due to strong wage growth, with the cost of employment remaining stable at 5.05% in Q2 and Q3. Wage growth is unlikely to slow in the current tight labor market, where job openings exceed unemployment.
Due to the tight labor market, inflation is proving to be persistent. As a result, the Fed is unlikely to reverse course until its preferred measure of sticky inflation, core Personal Consumption Expenditure (PCE) inflation, falls below the Fed's 2% inflation target. Inflation is unlikely to moderate significantly until unemployment exceeds annual core PCE growth. The marked area in the chart below denotes a period of high inflation that coincided with the unemployment rate falling below the core PCE rate. To keep inflation under control, the Fed will need to raise the unemployment rate above 5% (the core PCE rate).
Normally, there is a six-month lag between interest rate increases and their impact on the labor market. Therefore, a decrement in job openings and an increment in the unemployment rate is expected, in the first half of 2023. However, I expect that the Fed will have difficulty raising the unemployment rate above core PCE growth due to current labor shortages. Thus, I expect additional rate hikes and higher inflation in 2023. The higher inflation environment is very bullish for the gold market and in my opinion, the gold market will realize this impact.
Due to the current scenario of long-term inflation and higher interest rates, the treasury yield has fallen below 4.0%, resulting in a bearish bias in the U.S. dollar index. The chart below depicts a 37-year trend line starting in 1985. This trend line was broken in 2015, which caused the U.S. dollar index to soar. Following the breakout of the red trend line, the U.S. dollar index has been trading within the blue channel, which encounters strong resistance in the 114-115 range, which is designated as the "target" of this market. The achievement of the target led to a significant drop in the U.S. dollar index. The recent price structure indicates that the U.S. dollar index will continue to fall and is likely to reach 95 levels, as seen by the red arrow. The decline in the U.S. dollar index is viewed as a positive sign for the gold market.
The fundamental view of the gold market has been bullish due to current inflation and the Federal Reserve's policies. The technical view also reflects the fundamental view, as the gold market is compressing within a narrow range and poised to move higher as seen in the 50-year gold chart.
In the chart below, the inside bars are represented by their respective yearly candles. The inside bar for 1975 and 1977 was broken in 1978. The breakout resulted in a significant increase in gold prices in 1980. Prices pulled back sharply in 1980, causing a long upper shadow candle, implying that the gold market will remain sideways for a few years. Since the gold market has been in a consolidation phase since 1980, all inside bars from 1988, 1994, 1995, and 2000 failed. The gold market broke out in 2002, which resulted in a price gain of 450%, reaching $1,900 per ounce in 2011.
The inside bars for 2021 and 2022 can be observed in the above chart. One important point to note is that the inside bars for 2021 and 2022 were generated above the $1,680 inflection point. The $1,680 is considered as the inflection point, because of the closing level for the 2012 inside bar. Another bullish perspective in the above chart is the formation of a rounding bottom with a breakout above $1,680 inflection.
If the market breaks above the highs of the previous inside bar, it generates quick moves. The inside bar's highs for 2021 and 2022 were $2,075, therefore, if the gold market breaks above $2,075, it will quickly move to the next resistance level of $2,500. The breakout above $2,075 is very likely based on the current fundamental and technical view, discussed in the above sections.
As seen on the monthly chart for the gold market, the current market ranges between $1,680 and $2,075. The fact that gold is once again trading above the 10 and 20 exponential moving average (EMA) is an important signal that the gold market will be bullish in the first half of 2023. When the 10 EMA crossed over the 20 EMA in 2019, the price was in a bullish trend. Currently, the 10 EMA is crossing back above the 20 EMA, and this will be confirmed when the $2,075 level is breached. The RSI is also trending upward above the midlevel, which is also a bullish indicator.
Any forecast for 2023 is subjected to more uncertainty than usual due to job cut announcements, higher interest rates, and severe recession risks. Inflationary pressure remains due to geopolitical tensions, whereby there is a lack of policy transmission in the economy, which results in more severe economic fallout and stagflation conditions. The downside risk exists in soft-landing scenarios where risky assets may benefit and bond yields remain high, which is a challenging environment for gold. The geopolitical uncertainty due to trade wars, COVID-19, and the Ukraine-Russia conflict impacts global trade and financial risk. However, as investors seek to protect themselves from these turbulences, the tensions are a positive factor for gold investment. The chart below presents the geopolitical risk level, which is still very high.
Based on the above discussion, long-term inflation will be difficult to control due to the recent fast expansion of the money supply, high unemployment levels, and economic turbulences. Long-term inflation is also expected to increase additional investment by both individuals and central banks. The geopolitical tensions are expected to increase and continue to impact the Western financial system, which is a negative sign for the U.S. dollar and a positive factor for the gold market. Whatever the conclusion is, gold will almost certainly play a greater role in foreign reserve holdings for the central banks. Technically, long-term gold prices are constructed bullish, with $2,075 as the pivot for the next huge rally. Based on the above discussion and analysis, I expect that the pivot of $2,075 will be broken in 2023 to target $2,500.
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