Gold Rallies to 8-Month Highs Despite Rate Hike Spree. Why We’re NOT Surprised

In November, mainstream analysts fired gold’s future in a bearish glaze. But then, the clay began to crack…

by Nico Isaac
Updated: January 11, 2023

I recently learned of the ancient Japanese art form Kintsugi. This gorgeous practice takes shattered pieces of broken pottery, and mends them with a vibrant, gold-dusted lacquer. Once sealed, the cracks are brought into shining, stark relief, like amber streaks of syrup on bare, maple tree bark.

The finished product is a living record that imperfections are not meant to be ignored but rather honored as a part of growth; a way to use the broken pieces to rebuild inot something new.

(Pictured: Kintsugi bowl)

Now consider the shape of mainstream economic wisdom. This model is cast in a news-moves-market mold. It says factors outside a market, known collectively as "fundamentals," drive price trends. And yet, since its origin, magnificent cracks have recurred in this model, leaving it shattered. Meanwhile nothing has been done to try and mend the broken pieces into something stronger and new.

Until now.

Speaking of the golden glue of Kintsugi, let's review the recent performance in gold for a real-world example of the flaws of "fundamental" analysis. In October, gold prices were circling the drain of a 2-and-a-half year low. The precious metal had plunged 11%, and for seven straight months, its longest losing streak since the prototype for the modern typewriter was invented.

(Image from Nov. 1 Wall Street Journal)

Patch in global economic uncertainty, an ongoing war between Russia and Ukraine, persistent inflation, falling stock values, a still-unfolding pandemic -- in turn lots of scary spikey balls in the air -- and gold's downtrend stood in stark defiance of its usual safe-haven script. Noted Barron's on November 3:

"This should have been gold's year to shine... Many of the elements that traditionally boost gold were in play... Yet the yellow metal is down 10% in 2022, with much of those losses coming in the past few months.

"[These are] all the classical, historical reasons why you own gold. So, for sure, the performance here today is disappointing in this environment."

The mainstream experts had a back-up explanation. The newly adopted hawkish Fed policies -- i.e., the 5 consecutive hikes by the world's largest central bank (the Federal Reserve) -- trumped the bullish "fundamentals" in gold's backdrop. Said CoinNews.net on November 3:

"I don't see the tide turning for gold and it gathering bullish momentum again until after the Fed is done raising rates, probably not till March of 2023."

Understood: The might of the Fed's rate hikes would keep the pressure on gold. Except, that's not what happened. The Fed continued to raise rates, in November and December -- to the highest level in 15 years! -- and for its most aggressive tightening campaign since the early 1980s, and during that period, gold prices hit bottom and embarked on a powerful rally to 8-month highs (in January).

The old model of market analysis is in pieces. Yet, in Kintsugi-like fashion, there is a way to put them back together to create a new, stronger model; we use the glue of Elliott wave analysis.

On November 8, Metals Pro Service showed its Elliott wave count for gold, and said the bottom was in:

"The simple view is that 1618.30 marks the bottom of a multi-year flat correction as wave (4). That would make the sharp rise the first wave of a new bull market."

From there, gold turned around and embarked on a powerful rally to 8-month highs above $1880 per ounce on January 9.

No forecasting method always gets it right, but in the end, traders and investors can use the old, broken model of "fundamental" market analysis. Or they can carry the weight of their decisions in the new, reinforced vessel of our Elliott wave-based Metals Pro Service.

See below for more.