Following strong gains seen in yesterday;s session, the gold bulls exhibited some follow through today. Not only did the price of gold rise further but the bulls were able to take out key resistance at the $1836 level on a closing basis. This move may not only put the bears at risk but may also encourage more bullish behavior from existing and new investors.
Inflation remains the talk of the town. Recent inflation data showed a rise in price pressures at the highest level in three decades. As prices continue to climb, existing worries about the Fed falling behind the curve may intensify. If the Fed does fall behind the inflationary curve, it could have a significant impact on the domestic and even global economies. Alongside the threat of rising inflation is a drop in real interest rates. After the latest CPI data, real yields on the 10-Year Note declined to a record -1.235%. The difference between nominal 10-Year yields versus Treasury Inflation protected Securities rose to 2.64%. This break-even rate has expanded as the bond market is now pricing in more inflation risk.
With the yellow metal taking out key resistance today around $1836, there may not be much in the way of it headed straight to $1900 or higher. Adding some strength to gld is the fact that the metal rose to break resistance even as the dollar ascended to its highs of the year. This would seemingly suggest that gold could continue to rally as momentum is rich and the market has underlying strength. A dollar reversal could boost gold even more and the bulls would likely try to take advantage of any dollar weakness. If the dollar does top out near recent levels, it has the potential to cause buying across commodity markets and in dollar-denominated asset classes.
Despite some short-term indicators showing an overbought status in the market, the bulls may very well be able to take prices beyond $1900 in short order. While buying could potentially start to slow down within the market, it is currently not exhibiting any signs of a pounding reversal. Not only that, but any bears that are still hanging onto their positions could potentially be forced to cover on any further upside. This short covering could fuel another round of rallying higher while also attracting fresh bulls at the same time.
It is difficult to imagine a scenario in which gold declines substantially from current levels. That being said, the market will become increasingly vulnerable to a pullback the more it rises in the days ahead. Any pullbacks to support are likely to be aggressively bought at this point. The market may not spend much time on the decline either, but may see a rapid and significant bounce from any downside. The path towards sharply higher gold may now be set and fresh all-time highs could be on the way soon.