Gold Keeps Trading Sideways. Here's Why.

In early 2020, following the massive injection of liquidity into the financial markets by the Federal Reserve, many onlookers speculated that the price of gold would go on a massive bull run, comparable to the gold super-cycle we saw in the early 2000's:


In that market, gold went from ~$260 per ounce to more than $1,600 per ounce, a gain of more than 500% over the course of a decade.

This speculation, of course, was founded in the belief that a higher supply of money, as created by the federal reserve in 2020, would lead to devaluation of the dollar against gold, a "hard" asset.

What happened, in retrospect, has been something else altogether. The bull run materialized initially, when gold rallied roughly 40% over just 4 and a half months following the initial pandemic shock:


However, what followed was somewhat of a nothing burger, as gold has remained largely range-bound between $1,600 and $2,100 throughout 2021, 2022, and now more than half of 2023:


This has been a massive disappointment for gold investors, who likely believed that the M2 expansion in 2020 and 2021, followed by the inflation experienced in 2022 and 2023, would set up gold perfectly to outperform the broader market.

(Inflation):


Why has gold languished? Where is it headed? Here's our thoughts.

First - it's important to take a look at the futures curve to get a sense of market expectations:


This chart, provided by the kind folks over at COMEX and visualized right here on TradingView, shows that future expiries of the gold contract, going out over the next 6 years, are pricing in a linear ascent for gold between where it is now, at ~1,950, and $2,200. But is this what the market actually thinks?

No.

This curve is pricing in the expected appreciation over the next 6 years of gold Vs. the dollar -> it's essentially pricing in inflation. That said, it's still useful for getting oriented.

In reality, price discovery of supply and demand is still facilitated by the front month, most liquid contract.

So why has gold languished?

In our view, Bitcoin has played a massive part in stifling gold's potential ascent:


In the chart above, you can hardly make out gold's dramatic increase in 2020, due to the magnitude of Bitcoin's percentage rally.

Given the similarities between the products, and with many viewing Bitcoin as "Digital Gold" (a view which we hold as well), we may very well be seeing the disruption of gold as a financial instrument in the use case it has, up until now, owned exclusively. Time will tell.

In fact, the CME has launched Bitcoin futures - perhaps an omen of this very dynamic.

Bitcoin Futures (Ticker "BTC"):


As for where gold is headed next; we think gold should break higher above 2,100 at some point due to historical inertia and increased demand within broader jewelry and industrial use cases. When does a breakout happen? It's anyone's guess.

However, when that trade emerges, it should be a great opportunity to catch a breakout towards $2,400 & 2,600, the next fib extension levels:


We'll be sure to post about it if and when that happens.

Cheers!


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