By Barani Krishnan

Investing.com — $3,750 gold?

The world isn’t even sure about returning to $2,000 gold in the near term. Yet, far loftier projections are already being made.

It’s easy to dismiss any super bullish call on the yellow metal as outlandish and any acutely bearish forecast as absurd.

But if the charting on either side of extreme territory turns out to be true for gold, then we can brace ourselves for some phenomenal swings that could come in the coming weeks and months.

As of Friday’s close, gold returned to its $1,900 perch after erratic moves in the 72 hours after it had recaptured the price point it lost 20 weeks earlier.

The yellow metal also set another milestone – for May – as trading effectively closed for the month, ahead of Monday’s Memorial Day holiday: an 8% gain that was the best since July, or in 10 months.

Much of May’s action in gold was predicated by data on inflation – the other thing that's been supporting the comeback rally in the metal.

Inflation data over the past few months have rattled economists who fear that 2021 could see the biggest price spike in 35 years as the cost of almost everything, from houses to the lumber that goes into building them, soared.

Treasury Secretary Janet Yellen said on Thursday the spike in US inflation from a year ago is likely a temporary phenomenon caused by materials shortage in an economy rebounding from the COVID-19, and high annualized numbers could persist each month until the year end.

All things being equal, a higher inflationary environment is good for gold, which is seen as the best store of value in times of both financial and political trouble.

Yet in recent months, gold’s rivals, the dollar and U.S. bond yields, have rallied instead on signs of ramping inflation, as investors bet the Fed will hike rates faster than anticipated – something the central bank has sworn against. Such speculation triggered selloffs in gold that sent it to a near 11-month bottom of under $1,674, before a retreat in yields and the dollar helped the yellow metal claw its way back to $1,900.

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The Fed acknowledges the price pressures arising from bottlenecks in U.S. supply chains. The central bank has targeted an annual inflation of 2% over the past decade. But it has barely met that goal, with critics attributing the mismatch to the central bank’s dogged following of the PCE – a tame indicator stripped of food and energy costs, the most volatile components of inflation.

On the other hand, the Consumer Price Index, or CPI, which includes food and energy components, registered a 4.2% growth in April for its largest increase in almost 13 years amid soaring costs in an economy rapidly recovering from the coronavirus pandemic.

Inflation debate aside, multiple chart readings for gold are suggesting enough upside to vault the metal back to August record highs of $2,000 and above.

Among them are readings from Investing.com contributor Chris Vermeulen who posits a first major break above $2,067 that, if sustained at full throttle, could reach $3,750.

"The recent move above $1,900 in gold shows that precious metals are likely entering a new bullish price phase," Vermeulen wrote. "If our research is correct, gold may continue to rally higher – reaching a peak sometime near mid-October 2021."

Once gold clears $1,960-$1965, it should continue to advance to $2,067, then $2,305 fair quickly, says Vermeulen.

"It is important to understand how price moves in advancing/declining waves/phases over time."

"At this stage of the precious metals rally, which I believe is very similar to the 2003 to 2006 gold rally, we may see gold continue to rally higher while the US/Global markets continue to trend moderately higher. "

Vermeulen says there was a shift in how capital was being deployed in anticipation of Fed and global central banks tightening – whenever that comes.

A similar process took place in 2005-2007 when the Fed raised interest rates in an attempt to deleverage markets in an orderly way. But stock indexes and precious metals continued to rally as traders and investors had already started hedging risks of an unknown market event, even as the central bank continued to raise rates.

Vermeulen said with the Fed widely seen raising rates anytime between next year and 2023, there’s intense speculation that the central bank will have to act earlier to avert inflation concerns. He adds: “The similarities between the 2004-2007 gold rally to what we are seeing in gold right now are uncanny.”

If it played out as scripted in that cycle of 15 years ago, gold could potentially rise to as much as $6,500, Vermeulen says, although he maintains that he’s “focused on a target level near $3750 right now”.

The skeptics of the current gold rally have the metal going back to below $1,830.

Among them is Sunil Kumar Dixit of S.K. Dixit Charting in Kolkata, India.

Should gold regain its $1,900 footing, it will likely move up to $1,922, then $1,958, making what would be defined as “a triple top formation,” before plunging to between $1,848 and $1,828, Dixit said.

“To me, the odds of a pre-$1,960 plunge are a lot greater than a promising rally beyond $2,000,” he adds.

Dixit doesn’t regard himself as a gold bear at all. He actually likes the metal, but not to the extent that he’s blind to the pitfalls in its path. As such, he calls himself a “realist”.

Like him, many regard gold’s return to $1,900 levels as logical, overdue, and even remarkable, after the tortuous journey it’s been on earlier in the year.

But after so many false starts during mini rallies in the $1,700 and $1,800 levels, skepticism is understandably running high among this crowd.

Gold Market and Price Roundup

Gold futures for June delivery on New York’s Comex did a final trade of $1,903.60 before the weekend, after settling Friday’s trade up $6.80, or 0.4%, at $1902.5 an ounce.

The more active Comex gold futures contract for August also settled Friday’s trade up $6.80 at $1,905.30.

The spot price of gold, reflective of real-time trades in bullion, settled at $1,903.66, up $7.16, or 0.4%.

Traders and fund managers sometimes decide on the direction for gold by looking at the spot price – which reflects bullion for prompt delivery – instead of futures.

Oil Market Brief&Price Roundup

West Texas Intermediate crude for July delivery, the benchmark for U.S. oil did a final trade of $66.66 before the weekend, after settling Friday’s trade down 53 cents, or 0.8%, to settle at $66.32. For the week and month though, WTI rose 4.3%.

Brent crude for July delivery, which acts as the global benchmark for oil, did a pre-weekend trade of $69.01 after settling Friday’s trade down 74 cents, or 1%, at $68.72. For the week, Brent was up 3.4% while for May, it rose 2.2%.

Oil prices dipped on Friday but gained on the week and month as average pump prices of gasoline hit seven-year highs of more than $3 per gallon going into Monday’s Memorial Day holiday.

Memorial Day unofficially marks the start of the peak U.S. summer driving season, and the American Automobile Association expects as many as 37 million travelers for the occasion this year, up 60% from last year’s pandemic-suppressed number of 23 million. Those driving over the three-day stretch usually fill their tanks more than once, typically resulting in a boon for gasoline consumption.

Oil prices rose in anticipation of that demand, catching up with pump prices that have been edging higher for weeks.

“The average retail price for regular gasoline in the United States on May 24, the Monday before the Memorial Day weekend, was $3.02 per gallon, the highest gasoline price before Memorial Day since 2014,” the U.S. Energy Information Administration said in a post.

Pump prices were also up $1.14, or 61%, from a year ago, the EIA said.

Bets over Memorial Day consumption helped oil prices offset lingering concerns about a possible surfeit in supplies from Iran entering the market in coming months if Tehran succeeds in clinching a new nuclear deal with world powers that would lift U.S. sanctions on its crude exports.

WTI and Brent were also supported by U.S. government data showing stronger-than-expected drawdowns in crude, gasoline and distillate stockpiles last week.

Energy Markets Calendar Ahead

Monday, May 31

Memorial Day Holiday

Tuesday, June 1

Private Cushing stockpile estimates

Wednesday, June 2

American Petroleum Institute weekly report on oil stockpiles.

Thursday, June 3

EIA weekly report on crude stockpiles

EIA weekly report on gasoline stockpiles

EIA weekly report on distillates inventories

EIA weekly report on natural gas storage

Friday, June 4

Baker Hughes weekly survey on U.S. oil rigs

Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.

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