Gold's Surge Suggests an Everything-Rally is Brewing

Markets have been so strong lately that it kind of seems like the only question for investors right now is whether or not the speed of the gains will accelerate. That probably depends on how firm the U.S. economy remains. If it stays solid while inflation retreats, there’s probably no stopping this rally. But there’s no denying the string of hot late-summer data has cooled. To know which way we’re going, I’m watching commodities – particularly gold.

Despite the excitement around stock-market gains, crypto’s comeback, and the big bounce in bonds, it's gold that's trading closest to an all-time record. It’s far from the biggest winner on the year (+12%), but it’s back to a level it’s been battling for almost four years, and trades with a higher 14-day RSI momentum than the Nasdaq, Nvidia (NVDA), ARKK or bitcoin.

The fun and very tricky thing about a breakout in gold is that it might be happening for two almost polar opposite reasons. That’s because gold throughout this cycle has demonstrated a sort of U-shaped utility curve when plotted as a function of economic uncertainty. It does well when liquidity’s flooding into the system, doesn’t do very well when things are just fine or average, and then starts to outperform again when things get messy. Gold surged alongside everything else when the Covid rescue stimulus hit in spring 2020, lost its groove as things normalized, had a big but fleeting bounce as the stock market peaked in early 2022, and had another brief bout of bullishness when regional banks crashed earlier this year. Put another way, gold shines during “Everything” rallies, and “Nothing” rallies alike. The catch for gold bugs is that its strength during those risk-averse "nothing" moments often turns out to be a bull trap.

Right now, the evidence for an incoming Everything Trade certainly looks stronger than for a Nothing trade. The dollar’s in near-freefall, loosening financial conditions and helping other commodities to strengthen, too. Copper is on a good run, and the selloff in crude oil has tempered. Crazy enough, it resembles the type of action one would expect to see from an early-cycle type of refresh in the economy.

If it sounds too good to be true, it may be. A lot of this seems to be contingent on the Fed being able to soon cut rates without a deeper downturn in the economy, which strikes me as unlikely. Tolerance for warm inflation or cool data must be getting thin as a result. But if gold continues to strengthen alongside other commodities, an old-school Everything Rally may just be in store.