There are several reasons:
- The Fed will accelerate their increasing of interest rates
- This will cause a recession next year
- The chart above gives a technical reason
Increasing interest rates increase the cost of owning gold. Institutions borrow to own gold and retail has a opportunity cost of not getting interest on their money. So increasing interest rates will slow the demand for gold, particularly for institutional demand, including central banks.
I believe there will be a recession next year for sure and possibly late this year. The Fed's current policy almost guarantees it will happen. It is only a matter of time now.
That recession will stop inflation going higher and reduce the demand for gold, thus undercutting the price.
Gold is a leading indicator of recessions so gold will peak before the economy peaks. So gold will peak this year not next year.
Now let's turn to the chart above.
The top of the chart is a chart of GDX, the ETF that mimics large cap gold stocks. The bottom of the chart shows how bullish newsletters are. Notice how the newsletters are getting very bullish. They are not quite at the highs on the chart but almost there.
Now go back on the chart and see what happened to gold when the letters got this bullish in the past. That's right, gold sold off. I think we are basically within a week or so of that high.
Gold cannot rally when every body is really bullish. Who is left to buy? That is why over bullishness, like we see now, is a sign of a temporary high.
So here is my scenario based partially on the above reasoning.
Gold will rally for another week. Then it will sell off for several months and go into a sideway consolidation until the end of the year.
The threat to this scenario is that the Fed doesn't increase rates at the rate they say they are going to. That would change the scenario in that we would start a new bull move instead of the consolidation I mention above.
But, time to take some profits!
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