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May 9, 2020 | 3 Smokin’ Hot Gold Charts

Sean Brodrick

Sean is the natural resource analyst for Weiss Group. You can read his thoughts on gold, oil, cannabis, uranium and other natural resources at EdelsonInstitute.com

Gold is lookin’ shinier all the time. This past week was very strong as gold continues the bull market it started last year. And man, you ain’t seen nothin’ yet.

Let me show you a series of charts that make my point.

Chart No. 1: You Can’t Print Gold

Have you seen the way that the Federal Government is spending money? The Congressional Budget Office already admitted last month that the U.S. budget deficit will break $3.7 trillion in 2020.

But that’s an optimistic view.

According to many analysts, the combination of economic crash and COVID-19 rescue spending is going to cause even more red ink. Conservative think tank Manhattan Institute expects the budget deficit to be $4.2 trillion this year and stay high for years to come.


 

How is the Federal Government covering these checks? They’re electronically printing fiat currency to do it.

You can’t print gold. So, even though the U.S. dollar remains strong against other currencies for a bunch of reasons — basically, the greenback is winning a beauty contest in a leper colony — traders and investors alike keep buying more and more gold as a hedge.

What do I mean by that? Well, gold is a hedge against the federal deficit, fiat currency debasement and a global pool of negative-yielding bonds. It’s even a hedge against something we haven’t seen in a while, but traders fear could be around the corner — inflation.

Chart No. 2: Gold ETFs Hit New Record

And we can see traders buying gold hand over fist by looking at the holdings in physical gold exchange-traded funds (ETFs).

Globally, ETFs added another 170 metric tons of gold to their holdings in April. That took the total to a new all-time high, according to the World Gold Council.

And so far, the buying has continued in May with gold ETFs now holding 96.85 million troy ounces, as you can see from this chart.


 

Is the hand-over-fist buying in gold ETFs pushing gold prices higher? It sure looks like it.

Now, the gold ETFs can be a two-edged sword. When gold ETFs sell gold, that weighs on the market. But for now at least, the path seems clear — as gold ETFs add ounces, the price of the yellow metal will trend higher.

And traders are doing this with one nervous eye on the Fed.

Why? Because they’re afraid the Fed will go negative.

The Fed is currently targeting a benchmark interest rate of between zero and 0.25%. That seems low. But the fed funds futures market shows that traders are pricing in the potential that the Fed will slash its benchmark two-year Treasury rate below zero next year. The five-year Treasury also hit an unprecedented low.

This is happening even though Fed Chair Powell has pushed back against the idea of negative rates. But Treasuries went into a slide when Atlanta Fed President Raphael Bostic said on Thursday that the U.S. central bank would deploy its “full arsenal” to aid the U.S. economy, which has been left reeling by the COVID-19 pandemic.

So, how does any of this affect gold? Bullion typically benefits in periods of low U.S. borrowing costs and negative real rates. After all, one of the points that bears make about gold is that it doesn’t pay interest. Well, now it looks like interest on Treasuries is headed to less than zero.

It’s even worse when you look at real interest rates — yields taking inflation into account. Real interest rates are negative all along the curve, according to the Treasury Department …


 

Again, negative real rates are traditionally bullish for gold.

And it’s not the only bullish force. There are OTHER things going for the metal.

The World Gold Council reports that central banks continued to amass gold. Global gold reserves grew by 145 metric tons in the first quarter.

Also, total gold supply fell 4% in the first quarter as COVID-19 lockdowns hit mine production and gold recycling. Operations halted at many mines to stem the spread of the virus. And recycling came to a standstill towards the end of the quarter as consumers were confined to their homes.

Will these forces continue? They will if the pandemic is harder to stop than Wall Street and Washington believe. And I’m afraid I’m a pessimist on that count. I think this pandemic will drag on for longer than many people imagine.

Chart No. 3: Gold’s Next Breakout Is Coming

Now, let’s look at the bigger picture — a multi-year chart of gold.


 

You can see that gold formed a bowl-shaped consolidation pattern for years. It finally broke out of that last year, and it has zig-zagged its way higher ever since. The next two levels of overhead resistance are $1,785 and $1,886.

I believe gold could push above both those levels this year. In fact, my target for this year is $1,949. After that, we’ll probably see more consolidation before gold pushes above $2,000. But after that, we’re off to the races.

How high could gold go in this big bull run? I don’t have a crystal ball, so it’s tough to say for sure. But $3,000 an ounce and even $5,000 is very possible.

My Gold & Silver Trader subscribers are already riding this wave to fat open gains. And I’ll be adding new positions soon. Remember, in a bull market, pullbacks are buying opportunities.

The next buying opportunity for gold could be right around the corner. And the next leg right after that could be even higher.

I hope you’re riding this massive gold wave. The best is yet to come.

All the best,

Sean

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May 9th, 2020

Posted In: The Edelson Institute

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