Chart of the Day: Why Gold May Be Heading to $1,950

 | Dec 12, 2022 08:24AM ET

  • The market appears to be preparing for a recession
  • That, along with slowing rate bets, could support gold prices going forward
  • An upside breakout from current levels would indicate that gold's uptrend remains intact

    • In my Week Ahead article yesterday, I broke down the tension between economic growth and inflation on the one hand and interest rates and recession on the other.

    Yields are falling again after last week's rise, an interruption following a four-week decline. The dollar's journey was more volatile. All in all, it's lost 8.75% since its Sep peak, the highest in two decades. While we don't yet know what tomorrow's CPI print will show and how the Fed will respond to it on Wednesday, it appears that the market is getting ready for a recession . When investors focused on inflation, they weren't interested in the current payout, allowing yields to rise to their highest since 2008.

    However, the falling yields, which occur when demand for their underlying bonds rises, demonstrate that the current payouts are suddenly acceptable. What would be the change of heart?

    Two possible explanations:

    1. The more the yield rises, the more attractive it becomes

    2. The focus changes from concerns that rising prices will hurt economic growth to fears that the Fed's rapid tightening would cause a downturn.

    Now, it's up to pundits to pontificate on newfound appreciation for bonds' current yields. Is the rising demand due to a flattening interest rate path of focus on preservation over returns facing a recession? The difference is academic.

    On November 29, I predicted that gold would rise "to $1,800 on slowing rate bets." The yellow metal completed a falling flag continuation pattern, which helped it achieve a much larger reversal pattern.