Typically, there is a cost to holding gold which is the risk-free rate of return. For example in late-2018, the U.S. 1 year Treasury note had a yield around 2.7%. At the time, someone who buys and holds gold for a year is giving up this guaranteed return. Currently, the yield on the 1 year Treasury note is 1.6% which decreases this cost. Thus, interest rates tend to be the variable that has the greatest short-term impact on gold prices.
Are Interest Rates Ready to Turn Higher?
In many ways, gold bulls are basically betting that the economy will continue to deteriorate, leading to further interest rate cuts and boosting gold even higher. However, recent developments are not consistent with this picture. While the global economy has continued to weaken, the domestic economy has remained relatively strong.
Another reason to be skeptical about gold being able to hold these gains is that inflation is starting to perk up which will limit any further dovishness on the Federal Reserves' part. The Fed has already cut rates three times as part of its "mid cycle adjustment". There have already been positive effects to these actions in terms of asset prices and increased financial activity.
This chart of core CPI shows that its hitting 10-year highs. This is another data set that is at odds with the recession narrative that's become almost widely accepted over the past year. In contrast, few are discussing that inflation is on the verge of breaking out. However, this will certainly cool the Fed's enthusiasm for rate hikes especially given recent improvements in the economy and asset prices returning to previous, lofty levels.
Gold had a bull market blowoff top in late 2011. This was a period of greed and bullish excess for gold, and many traders got caught at these high prices. It's unlikely that gold can slice through the $1,600-$1,900 range as there will be a lot of trapped buyers at these levels, forming a formidable wall of overhead supply.
In 2011, many believed that the Fed's QE would result in hyperinflation and a bubble in asset prices. Ultimately, there was no hyperinflation, as QE led to an explosion in reserves but not in actual credit entering the economy. Ironically, people bought gold to protect from a bubble in other assets but actually created a bubble in gold which unwound from 2011 to early 2016.
Looking forward, gold should see selling pressure as it contends with overhead supply and increased acknowledgement that the economy has survived this growth scare and now may need to grapple with inflationary threats leading to more hawkish policy.