Investors are eyeing gold very carefully right now. And it's not hard to see why.
As you can see from the chart below, the yellow metal had a great year...
Long-time readers will know that I've been bullish on gold for a while.
Many investors have been flocking to gold in the last few years and for good reason. It’s a great diversifier, it protects against inflation, and it’s a safe-haven asset when things go awry.
All of these things have led to a rise in gold demand and, subsequently, a run-up in gold prices. In fact, the average price of gold reached record highs several times this year surpassing $2,700 by October.
Gold prices have been a bit more volatile, following Trump’s inauguration. But now that investors have had time to adjust to Trump’s win and a Republican sweep of the House and Senate, gold appears to be ready for its next leg higher.
I've had my eye on a price target of $3,000 per ounce since 2021.
And the post-election gold pullback is a good time to look at miners before it finally takes on $3k.
But first, let's look at how gold reacted to Trump's victory...
Leading up to the November election, gold had plenty of bullish momentum. Investors had significant concerns about inflation, the economy and the geopolitical landscape. And that fear helped to drive capital into safe-haven assets like gold.
However, Trump’s victory triggered a notable shift in market sentiment, causing gold prices to retreat from their previous highs.
This pullback reflected a broader market pivot away from defensive positions as investors reallocated capital toward growth-oriented assets, anticipating potential economic stimulus and deregulation.
The initial selloff, while swift, appears to be just a temporary move that is disconnected from the underlying fundamental factors that traditionally support precious metal prices.
Market participants’ immediate reaction prioritized optimism about growth prospects over persistent economic challenges that continue to support gold’s long-term value proposition.
Specifically, after years of above-trend inflation, gold still has a long way to go to catch up to the broad devaluation of the U.S. dollar.
So even though capital temporarily moved out of gold and into more speculative areas of the market, there is a robust fundamental case for gold to continue its long-term trend higher.
Recent market activity indicates that gold has found solid technical support, with prices stabilizing over the past two weeks.
This price support comes alongside a backdrop of persistent inflation concerns. For example, November’s core inflation reading of 3.3% shows that inflation continues to be “sticky”.
Of course, the interest rate environment plays a crucial role in gold’s short-term outlook.
Rates initially moved higher following the election, reflecting expectations of a less accommodative Federal Reserve.
The fear was that higher growth policies coupled with tariffs could reignite inflation and require the Fed to take a more hawkish stance.
But more recently, long-term interest rates have begun to pull back.
That’s because even though inflation is above the Fed’s 2% target rate, the Fed believes that rates are currently restrictive and that the balance between rates being too high (and pressuring the economy) versus too low (and allowing inflation to re-emerge) is tilted a bit towards rates being too high.
Rumors of a potential “shadow Fed Chairman” may also be pressuring long-term interest rates as investors bet on Trump strong-arming the Fed into keeping rates low to help boost the overall stock market.
Rising rates helped to boost the value of the U.S. dollar — at least in comparison to other international currencies. And while inflation continues to erode the purchasing power of the dollar, a strong dollar in currency markets tends to pressure gold.
But now that interest rates are done climbing, gold’s headwind is removed. That’s another reason we can expect gold prices to kick off another leg higher.
The Daily Reckoning