Jordan Roy-Byrne: Gold prices likely to consolidate ahead of potential rally next year

Earlier in the year, the Ukraine-Russia conflict sparked a bull run in gold, smashing through its historic highs to settle at $2,078 in March 2022.

However, in a few short months, real interest rates were surging, the Fed continued its outsized monetary moves, and the dollar index sped to above 114 in late September.

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The markets turned against the yellow metal with some analysts even calling for the price to test levels that were anywhere from $200 – $400 lower than spot.

The tightness in financial markets saw gold crashing to a two-and-a-half-year low near $1,630 levels while struggling to keep its head above the $1,700 level from September through to November.

However, this trend turned the corner, with an impressive bull run, and prices rising to above $1,810 as of the 1st of December, following indications that the Fed was reaching the latter stages of its rate hike cycle, and a CPI slowdown to 7.7%.

Yet, over the past week, the shine has come off the gold market, if just a tad, with prices slipping to around $1,780 levels before a limited rebound materialized.

At the time of writing, the spot price stands at $1,797.60, having touched $1,800.1 earlier in trading, and visiting a low of $1,793.20.

Jordan Roy-Byrne, Founder and Editor of The Daily Gold, believes that a pull-back in the precious metals including silver was expected as prices rapidly approached key resistance levels.

Gold had tested the 200-day and 400-day moving averages, before declining by 1.2% in the past 5 sessions.

Consolidation ahead

For all the tumult the metals and broader markets have endured this year, gold appears to have outperformed traditional equity indexes by a fair margin thus far.

The graph below only provides a snapshot of performance as of 8th December 2022.

Although current levels are important for the precious metals, including silver, which broke through $23 earlier in the month, a rally to higher prices will be unlikely to take shape until the end of the rate hike cycle becomes crystal clear.

Given the weakening macro picture, dovish comments and the fall in US treasury yields, gold holders could see some price consolidation with Roy-Byrne stating,

I am not worried about precious metals rolling over and making a low…I do think the bottom is in.

Decoupling needed to supercharge gold rally

Although the broader markets moved roughly in sync with gold in the last couple of months, Roy-Byrne believes that the key breakout for gold would come if the precious metals markets can decouple from equities and other financial assets.

Amid falling GDP forecasts and rising global protectionism, if a full-blown recession were to kick in during the first half of 2023, rates would be forced lower along with equities, which would support the gold price.

Roy-Byrne predicts that we could see,

…(a) huge divergence where precious metals start to really outperform and the stock markets rolling over….it just doesn’t look imminent right now.

In an earlier piece, I wrote about how Mike McGlone expects the $2,000 mark to become a new low for gold prices once the Fed pivots.

It should be noted that as the global economy slows, the environment is likely to be much more bullish for gold than silver in the near term, due to the tight connection between the silver price and industrial demand.

In this piece, I discussed why Phillip Newman anticipates a rough year ahead for silver.

Physical decoupling

In earlier articles, I have written about the tight grip that the paper markets have on price-setting in the gold space, as well as examples of the falling confidence of investors in global exchanges (which you can check out here).

This year, we have witnessed a flurry of physical precious metals and others assets leaving digitized systems altogether, such as in the case of the Comex and the LBMA.

With global geopolitical tensions brewing, especially among major economies such as China and the US, as well as with leading commodity producers including Russia and Saudi Arabia, there is potential for physical gold holdings to become more central to investor portfolios in this high-risk environment.

Interestingly, Russia’s efforts to establish a Moscow World Standard, a global, physical bullion exchange, seem to have garnered the attention of some key players in the market.

Although paper prices are likely to rally in Q1 or Q2, given these high-risk factors including recent challenges in the withdrawal of metal assets, it is unclear how sustainably derivatives may perform amid the rising preference for physical ownership.