Gold Eyes Record Highs

The dollar weakens as Fed is seen being less aggressive following the release of FOMC minutes as core inflation remains concerning. Can it send gold higher?

Gold’s Return as a Store of Value

The dollar has been oppressed recently, helping push the price of gold above the $2,050 mark and higher by 13% YTD. One of the catalysts is the expected end of the Fed's most recent tightening cycle as the banking crisis relieved the strain the US economy is under. The Fed considered that at the last FOMC meeting, and from the minutes, it emerged that the expectation is for just one more hike. Additionally, staff projections are now considering a recession in the latter half of the year, a reversal from reassurances that the economy will stay out of the red.

At the same time, inflation remains well above the Fed's target, with the core rate even rising (the first time in 7 months). Gold's status as a store of value returns to focus when the dollar is expected to continue to experience value erosion. Particularly with the market pricing in rate cuts by the end of the year, yields in dollar-denominated debt have been declining, making treasuries increasingly less attractive as an investment. That's before market volatility that could be inspired by debate over the debt ceiling, which is already pushing up premiums on insuring US debt. The debt ceiling debate could come into focus in the coming weeks after Congress returns from its two-week spring recess.

Gold Supply Constrained

Beyond the usual price fluctuations driven by economic data, gold faces a supply issue similar to other commodities. The latest inflation crisis has raised the demand for gold (central banks are buying up at record rates) but, at the same time, raised the cost for gold miners to explore. Higher gold prices have helped elevate margins for gold miners, who must offset depleting reserves. But rather than spend that on relatively risky exploration, many firms are opting to buy up rivals instead, leading to consolidation in the market.

Gold exploration budgets are finally rising, but developing new projects often takes years. This could constrain supply in the short term. On the other hand, there is rising interest in exploring copper production, which usually coincides with gold deposits. That could help bring supply back online but at a delay. The largest copper mine under development is the La Granja project in Peru, between Rio Tinto and First Quantum, which has up to 2.5Mt of gold. But neither company expects to break ground this year, illustrating the lead time issue in gold supply.

Technically Ripe for Record Highs

Gold appears somewhat rangebound from a long-term perspective but has been in a bullish continuation since the flag pattern completed down at $1620/oz. In fact, it still trades within the upward channel boundaries, with the recent bounce at $1810/oz marking a sharp upside, aiming at record highs. Bulls seem determined above the $2k threshold as it acts as a confirmed support after the retest, implying there is more room to move higher.

If gold fails to break above the critical record high at $2090/oz, and instead losses the 2k support, it could indicate a bearish reversal and lead to a decline towards $1800/oz.

Key takeaways

The price of gold is rising due to the weakening of the US dollar, with the expected end of the Fed's recent tightening cycle and concerns around inflation being contributing factors. Gold also faces a supply issue, as higher prices have led gold miners to pursue consolidation rather than risky exploration. While gold exploration budgets are beginning to rise, developing new projects takes years, potentially constraining supply in the short term. Gold is still in a bullish trend with the potential to reach record highs, but there is a risk of bearish reversal if it fails to break above $2090/oz and loses support at $2k.