After months of consolidating high, just suffered a serious technical breakdown. The catalyst was a better-than-expected US boosting Fed-. That goosed the US dollar, unleashing gold-futures selling. This return of past years’ gold-fearing-Fed paradigm is vexing, yet irrational based on history. So it should prove short-lived, with this anomalous summer-doldrums selling carving a major bottom.
As always understanding big unexpected price moves requires perspective. Back in late January, gold’s largest cyclical bull ever in US-dollar terms peaked after soaring an astounding 196.4% in 27.8 months without a single 10%+ correction! The speculative-mania buying climaxing that drove overboughtness stratospheric, as gold stretched a mind-boggling 43.4% above its baseline 200-day moving average!
That proved the most overbought gold had been since March 1980 a whopping 45.9 years earlier! Thus gold needed a serious reckoning to rebalance epically-extreme technicals and sentiment. Following its next-ten-largest dollar cyclical bulls since 1971, gold’s average drawdown was a big 20.8% in just 2.1 months. Indeed by late March, gold had plunged 18.6% in 1.8 months which aligned quite well with that precedent.
From there gold bounced, then spent the next 2.3 months establishing a high-consolidation trading range with late March’s $4,390 low being support. The longer a sideways drift persists, the more durable it becomes technically. So after such a long span of gold remaining well above $4,390, traders weren’t worried about it failing. That was readily apparent in speculators’ gold-futures positioning before that breakdown.
In the latest-reported weekly data before Jobs Friday, specs’ collective downside bets on gold or short contracts plunged to an incredible 16.8-year secular low! Last week an upside surprise in key economic data wouldn’t even have made it on my top-five list of near-term gold threats. Last Friday the 5th just minutes before that May nonfarm-payrolls report, gold was trading right up near the prior day’s close of $4,477.
That jobs data was really good, with the headline +172k added last month more than doubling the +80k estimates in a four-standard-deviation beat! And past-two-month revisions which almost always prove negative added another +93k. The household survey which often contradicts the establishment one feeding nonfarm payrolls showed +149k jobs. Wage inflation also printed right in line with economists’ forecasts.
Algorithms traded instantly on that huge upside surprise, upping Fed-rate-hike odds, pouring into the US dollar, and dumping stock-index and gold futures. Never mind that the biggest contributor to that beat was leisure-and-hospitality jobs surging 70k in May, way out of line with their prior-twelve-month average of +14k! That was likely due to the earliest-possible Memorial Day weekend and big World Cup soccer hiring.
Gold could’ve plunged a hefty 1.9% that day and still remained within recent months’ high consolidation. But the momentum selling grew so fierce gold plummeted 3.7% on close, shattering its trading range’s well-established support! That heavy selling spilled over into this week, with gold falling 1.6% Tuesday and another brutal 4.3% Wednesday. That extended gold’s total drawdown to 24.5% over 4.3 months!
The timing was almost certainly a major factor in gold’s surprising collapse. June is the heart of gold’s weakest time of the year seasonally, its summer doldrums. Gold tends to drift sideways to lower in this low-volume span, where outsized buying or selling can disproportionally bully its price around. As price action drives sentiment, consensus has quickly shifted really bearish with serious additional selling predicted.
But is that rational? After extreme price moves in any market, herd groupthink expects they will continue indefinitely. Remember in late January when absurd vertical gold upside targets abounded right when gold was dangerously topping? Odds are the reverse is happening now, with analysts increasingly calling for much-lower gold prices from here. Yet excessive pessimism is the leading sign of a major bottoming.
For years monthly US jobs reports often really moved gold prices, although that faded through gold’s late monster record bull. That’s why it was so shocking to see that old gold-fears-Fed relationship suddenly rekindled out of the blue. The dynamic is simple. The Federal Reserve has a dual mandate imposed by Congress, promoting stable prices and maximum employment. The latter became law in November 1977.
So no other major economic data affects the Fed’s federal-funds-rate trajectory more than those monthly US jobs reports. If American employment weakens the Fed is more likely to shift dovish, either cutting more or hiking less. The opposite is true if jobs strengthen. So better-than-expected nonfarm payrolls imply higher interest rates ahead, increasing yields in US Treasuries which is bullish for global US-dollar demand.
And the hyper-leveraged gold-futures speculators who often dominate short-term gold price action usually use the dollar’s fortunes as their primary trading cue. They sell gold futures when the dollar rallies, and buy them when it falls. Jobs Friday’s strong 0.7% surge in the US Dollar Index was its biggest since mid-March. That earlier 0.8% one came after a hotter PCE-inflation print, top Fed officials’ preferred gauge.
Yet that day gold only fell a proportional and reasonable 1.3%, a far cry from last Friday’s ugly 3.7% drop. Making that breakdown look even more anomalous, after that jobs upside surprise were only pricing in a single 25-basis-point rate hike by year-end! Gold’s plummeting was even more improbable given specs’ gold-futures longs heading in were just 0.8% above the prior week’s 3.5-year secular low!
So gold-futures speculators shouldn’t have had much room to dump longs, although they did have big room to ramp shorts out of their deep secular low. Unfortunately the latest positioning data straddling Jobs Friday revealing what those traders did won’t be released until late this Friday afternoon, well after this essay is published. But the resurgent view that Fed rate hikes are bearish for gold is highly-suspect.
Changing implied federal-funds-rate trajectories do affect US-dollar pricing, which again often drives gold-futures trading. That remained evident in recent years despite gold’s monster record bull. This chart looks at how gold performed during the ’s big swings. Out of 13 of these since 2024, gold’s price action was inversely correlated with the US dollar’s fully 11 times! So gold hasn’t escaped the dollar’s tyranny.
While gold can overcome the USDX and rally concurrently with it, that remains quite unusual and requires gold blasting higher in major bull runs fueling widespread bullish sentiment and chasing. With sufficient upside momentum, even gold-futures specs stop fixating on the dollar’s fortunes. And on individual trading days when the dollar sees outsized moves, gold’s opposing reactions are generally roughly proportional.
So last Friday on that jobs beat, the USDX’s 0.7% surge should’ve resulted in a similar gold drop up to maybe double on the outside. The latter would’ve been a 1.4% gold down day, far smaller than that 3.7% leaving gold still within recent months’ high-consolidation trading range. So the stronger dollar doesn’t come anywhere close to explaining gold’s breakdown technically. But I suspect gold Fed fears flaring does.
For as long as I can remember, traders and analysts have believed higher rates are bearish for gold. The reasoning sounds logical, gold is a sterile asset yielding no income of any kind. Thus the higher bond yields supported by underlying central-bank benchmark rates, the less appealing gold is to investors. In a 1% world the opportunity cost for holding gold is minimal, but when sovereign bonds yield 5%+ it is considerable.
Yet in markets conventional wisdom is often wrong, as evidenced in traders growing overwhelmingly bullish at major toppings and excessively bearish near major bottomings. So instead of blindly believing market adages, my approach has always been to study market history to see if they’ve indeed proven true and to what extent. Back in September 2015 I launched a research thread on gold in Fed-rate-hike cycles.
That was an interesting time, as the Fed had forced its FFR to zero continuously since December 2008 in response to that year’s epic stock panic. Gold had languished in a secular bear for years on increasing anticipation of the Fed launching a long-overdue rate-hike cycle. I periodically updated that research over the years, the last time in a comprehensive mid-February-2022 essay “Gold Thrives in Rate-Hike Cycles”.
Gold’s entire history in US-dollar terms effectively starts in 1971, when the previously-pegged-to-gold US dollar was severed from its gold standard. So I analyzed then how gold performed through every Fed-rate-hike cycle from 1971 to present. Those were defined as three-plus consecutive increases in the federal-funds-rate target with no interrupting decreases. Then like now gold traders really feared Fed rate hikes.
The results proved surprisingly-to-shockingly hardcore contrarian. As of February 2022, there had been 12 Fed-rate-hike cycles since 1971. Gold actually rallied through the exact spans of 8 of those 12, and fell in the remaining 4. Gold’s average gains through the 8 rallying rate-hike cycles clocked in at a huge +49.0%, while its average losses in the other 4 falling ones merely came in at an asymmetrically-small -10.5%!
Across all dozen Fed-rate-hike cycles in that very-long 51.2-year secular span, gold actually averaged strong gains of +29.2%! I found two key factors mostly governed gold’s performance during Fed-rate-hike cycles. Those were how overbought gold was entering them and how aggressive the Fed-hiking cadence was within them. Gold fared best starting them relatively low when the number and pace of hikes was mild.
I really need to update this research thread, incorporating additional data such as gold’s best gains and worst drawdowns within each Fed-rate-hike cycle. And since then there has also been a 13th one that proved one of the most violent ever. From mid-March 2022 to late July 2023, the Fed hiked its FFR an astounding 525 basis points off ZIRP! That included a shocking four individual monster 75bp hikes in a row!
The Fed hiked 50bp in early May 2022, 75bp in mid-June, 75bp in late July, 75bp in mid-September, 75bp in early November, and 50bp in mid-December that same year! That shock-and-awe hiking cycle was executed to combat raging inflation, with the US CPI cresting at a 40.6-year high up 9.1% annually in June 2022! Those hikes catapulted the USDX parabolic, soaring 16.7% in 6.0 months to a 20.4-year secular high!
Such a blistering dollar moonshot indeed slammed gold, which plummeted 20.9% in a parallel 6.6 months into late September 2022! That jaw-droppingly-extreme episode confirmed to traders that gold should fear Fed rate hikes. But again that proved one of the Fed’s most-violent hiking cycles ever, far beyond norms. If the FOMC again launches its FFR stratospheric with 400bp of hikes in 7.3 months, gold will be slaughtered.
But the likelihood of something similar happening in coming years is effectively zero. That epic 13th hiking cycle since 1971 again started off zero, with a 0.13% FFR target. Today that is radically higher running 3.63%. Back then CPI inflation again crested at that extreme nearly-half-century high up 9.1%, far worse than the hottest in recent years. This week’s May CPI was up 4.2%, merely the highest since April 2023.
And despite gold’s crushing drawdown during the worst of 2022’s savage hikes, across that entire 13th Fed-rate-hike cycle since 1971 gold actually still rallied a modest 3.0%! That boosts gold’s track record to climbing through the exact spans of 9 of those 13 cycles. And if the Fed embarks on its 14th later this year which seems unlikely, gold is nicely set up to thrive again. Rate-hike cycles require three-plus hikes in a row.
Maybe the Fed will hike once or twice later this year, as implied in federal-funds futures after that big jobs upside surprise. But another rate-hike cycle seems incredibly unlikely. Trump’s new Fed chair who was handpicked to lower rates is taking the helm for next week’s FOMC decision. It is hard to imagine Kevin Warsh pushing for rate hikes. And if other top Fed officials force them anyway, they will be normal 25bp ones.
If three of those somehow accrue consecutively, it will be the mildest-possible Fed-rate-hike cycle in history. Gold really thrives in those. And thanks to gold’s anomalous breakdown since Jobs Friday, by midweek gold had plunged to oversold levels fully 7.7% under its 200dma. So unless gold soars leading into any initial Fed rate hike, it won’t be anywhere near overbought. These are ideal conditions for gold to rally.
With gold heading into any Fed hikes likely oversold to neutral, and any hikes likely to be small, few, and sparse probably not even adding up to a hiking cycle, gold’s history argues it is very irrational to fear Fed rate hikes today. So odds are overwhelming that gold’s recent momentum-driven plummeting on that jobs beat has carved or will soon lead to a major bottoming. Whatever meager Fed rate hikes loom are immaterial.
Traders succumbing to soaring herd bearishness after three anomalous trading days of heavy gold selling are overlooking some super-bullish factors for gold ahead. I wrote about the two primary ones in last week’s latest gold-summer-doldrums essay. First spec longs were just down near that deep 3.5-year secular low, implying these super-leveraged traders have vast room to buy gold futures but little room to sell.
So when gold resumes rallying consistently establishing some convincing upside momentum, specs will likely increasingly flood into longs amplifying its gains. That could start soon, as gold’s strong seasonal autumn rally generally starts picking up steam in mid-July. Second American stock investors’ implied gold portfolio allocations are now running about one-third of one percent! That may as well round to zero.
That’s the ratio between the value of the massive world-dominant US GLD, , and gold ETFs’ bullion held for shareholders to the total market capitalization of all the stocks. Because US stock markets have soared to many record highs this year on AI-bubble euphoria, American investors enamored by tech stocks have ignored gold. As these bubble-valued markets inevitably roll over, that will change.
Weakening stock markets boost gold investment demand for prudent portfolio diversification. And gold is the ultimate portfolio diversifier. As tech-stock-dominated portfolios start to burn in a serious correction almost certain to grow into a long-overdue bear, gold allocations will rise. Those coming capital inflows will prove very bullish for gold, even if American stock investors merely double or triple their trivial positions.
So it’s really irrational for gold traders to fear Fed rate hikes today. It would be a way-different story if gold was still crazy-overbought like late January, or the Fed was likely to soon embark on one of its biggest-and-fastest hiking campaigns ever. But with neither true, any Fed posturing on hiking rates again soon should be ignored. A few token hikes are far too small to derail gold’s other powerful bullish fundamentals.
The bottom line is gold was just slammed into a serious technical breakdown on Fed-rate-hike fears. A big upside surprise in monthly US jobs shattered recent months’ high-consolidation support. But that momentum-fueled selling was very irrational. Gold actually has a half-century-plus history of generally thriving in Fed-rate-hike cycles. That’s especially true if it isn’t overbought entering them and they are mild.
Gold’s post-jobs pummeling left it quite oversold, and Trump’s new Fed chair isn’t likely to preside over more than a handful of token hikes at worst. Even after that jobs data, futures were only pricing in a single 25bp hike by year-end. So gold won’t be distracted by Fed-rate-hike fears for long, likely carving a major bottoming. Then gold’s own strong bullish fundamentals will reassert themselves fueling its next upleg.
