Battle line drawn: Gold bulls look to push through $2,000

Gold prices surged to test the $2,000/oz level early this week before retreating ahead of the Federal Reserve's interest rate decision.

Fed policymakers opted for another 25 basis-point hike -- disappointing investors who had hoped for a pause in the wake of high-profile bank runs.

Stocks sold off in post-Fed trading on Wednesday afternoon. Precious metals markets, however, managed to record gains for the day.

Fed chairman Jerome Powell signaled that the central bank would likely hike one more time.

After months of rate increases that have ratcheted the Fed funds up from effectively zero to its current 4.75 - 5.0%, and not knowing when the tightening campaign would end, investors can finally see some light at the end of the tunnel.

Markets are even beginning to price in a likelihood of rate cuts by the end of the year. Powell denied that the Fed is expecting to have to reverse course on rates, but his hand could be forced by a worsening banking contagion and deteriorating economy.

The Fed's final capitulation on interest rates could coincide with a breakout in gold to new all-time highs.

The battle line has been drawn at the $2,000 level. Bears eye it as an opportunity to put in sell orders. Bulls see the potential for a decisive break above $2,000/oz to serve as a springboard for an epic run higher.

Gold faces resistance between $2,000/oz and $2,100/oz where prices got capped last year and in the post-pandemic run-up of 2020. Once those peaks are taken out decisively, there will be no ceiling for gold – and $2,000/oz could become the new floor.

Recent trading around this psychologically significant level is bringing out a volume spike in physical markets.

On the one hand, there has been a surge in bullion buying that has overwhelmed dealers, raised premiums, and threatened to produce shortages in available coins, rounds, and bars.

On the other hand, there has also been a surge in jewelry and scrap gold being sold for cash by those who think they are getting a good price.

Of course, many people need to raise cash in order to pay bills. But exchanging gold (sound money) for U.S Federal Reserve notes (unsound money) and depositing them into a bank account carries risk.

They shouldn’t be reassured by Powell’s declaration following the Fed’s interest-rate decision that “our banking system is sound and resilient with strong capital and liquidity.”

That “strong capital and liquidity” is being provided by the U.S. taxpayer and the Fed itself via expanded deposit guarantees and emergency lending vehicles (i.e., bailouts). Such moves to make the banking system appear “sound” come at the cost of making the currency even less sound.

The gold price is beginning to reflect the strains on the monetary system, advancing to within striking distance of a new record despite the most rapid rise in interest rates seen in decades.

The silver market has been comparatively quiet, but when it wakes up its percentage moves higher could be much bigger than gold’s going forward. The white metal would need to more than double from here to equal its old high.

Those who are tempted to sell gold at $2,000/oz because they think they are getting a good price may be partially right… they are getting a good price in terms of the number of ounces of silver they can buy.