The Price of Gold Exceeded $2500. Breaking Records Continues

Very important developments are taking place in the gold market recently, which may indicate the continuation of rapid price increases and market strength.

Last week, the price of gold exceeded the $2,500 for the first time. This has been greatly helped in the short term by expectations that the Federal Reserve will start interest rate cuts in September. There is also growing concern about the health of the global economy.

Gold rose 2.1 percent, two weeks ago, to $2,507 an ounce, a new all-time high. The $2,500 level is a very important level. The previous big milestone was $2,000, which turned out to be quite strong resistance for gold. As of 27th August 2024 the price of gold is $2512.05.

So far this year, the price of gold has already risen by more than 20 percent

Gold was boosted on Friday by weaker-than-expected figures from the US housing market, which increased the likelihood of a bigger-than-expected rate cut by the Federal Reserve in September.

Lower interest rates have a good effect on gold, because they reduce its opportunity cost (forgotten income if, for example, one decides to buy interest-paying government bonds instead of gold).

Gold’s Record Reflects Major Economic problems

The rise in gold prices is not only due to strong demand, it also reflects major problems in the economy. The price of gold has exceeded the performance of the major stock indices in terms of 1/2 a year, one year, two years and three years. Such a strong upward trend clearly indicates that all is not well in the world’s major economies.

There are increasing fears that an economic recession is coming in the US

This is indicated by the inversion of the interest curve, labor market data and the beginning of the interest rate decline cycle.

The inverted interest rate curve, where short-term interest rates rise above long-term interest rates, has lasted for more than two years. Of the last 10 times when the yield curve has inverted, in nine cases in the US it has been followed by a recession (an economic recession lasting at least two quarters).

And the longer the yield curve has been inverted, the greater the decline in the economy and stock markets has become. The current yield curve inversion cycle is the longest in US history, suggesting a mega crisis is coming in the next 6-12 months. In addition to this, stock market peaks and the beginning of the economic recession have usually remained close in time to the cycle of central banks’ interest rate cuts.

Budget Deficits Add Fuel to the Fire

Government budget deficits are also a very important factor. In the US, the budget deficit for the last 4-year period has been the largest since the Second World War. When a recession hits, the government has to borrow even more and increase spending to get out of it.

In the US, the budget deficit during Biden’s presidency has been a total of 7.5 percent of the gross domestic product. In the US, however, the deficit is comparable to what it was during the Second World War, so to speak, during a good period of economic growth.

Therefore, when the economic crisis comes, the US government will borrow even more.

Historically, an increase in the government budget deficit has had a very supportive effect on the price of gold

It is true that during an economic crisis, gold can become temporarily cheaper, because all financial assets tend to be sold in the first months of the crisis.

The reaction will be money printing and an even bigger deficit in the government budget, which may begin to undermine investors’ confidence that the US and many other countries will actually repay their debt. This would be an extremely supportive environment for gold. You can read more about how the US government debt bubble is bursting here.

The Technical Picture of Gold Strengthened

Breaking the $2,500 level is a very important milestone for gold. The fact that gold just closed above this level at the end of the week is also extremely supportive, indicating strength when looking at the technical picture.

Tavex Analyst Comment:

Since I don’t expect anything drastic to happen to the US, Europe, China or any other economy in the next 3-4 months, we can probably expect the gold price to continue to rise. In dollars, gold can now reach the range of 2700-2900 dollars quite quickly after crossing 2500 dollars. Historically, August and September have been the best months for the gold market, next to January.

Gold remains an important support level at $2,300. Although there may be some pullback after the new records, we are unlikely to see a drop to this level in the coming months. The technical picture is currently strong and I see the continuation of the rise and a series of new highs more likely.

However, if gold were to fall back to the $2,300 level, it would offer an extremely attractive buying position in my opinion.