Gold/USD: gold forecast following this year's consolidation

Gold consolidated its levels this year, despite rising inflation in developed economies. Will we see record levels again next year?

In a period of rising inflation and supply chain bottlenecks, gold has not served its purpose in an investment portfolio - to serve as a hedge against inflation. In fact, just the opposite has happened to frustrate gold investors.

It is said that every portfolio should own gold and have a small portion in cash - just in case an opportunity arises. But gold's long periods of consolidation have made the yellow metal unattractive to new retail traders used to the high volatility of other assets, such as cryptocurrencies.

As the Financial Times recently put it, gold is an analog product in a digital world.

But this isn't the first time gold prices have consolidated for a long period of time. In fact, in recent years, it has done so again - between 2016 and 2019. While the Fed was busy raising the federal funds rate, gold proved resilient. It consolidated for three years and eventually collapsed on the upside, despite the Fed's hike.

Could it be that the current consolidation is just another continuation pattern of gold's long-term uptrend?

This is not the first time that the price of gold has acted with a lag

Just as gold prices held up in 2016 and 2019, they could also act with a lag this time around. Consider the price action during the pandemic.

First, gold is hitting a new all-time high thanks to the Fed's decision to open U.S. dollar-denominated swap lines with other major central banks around the world. In this regard, gold has acted in a correlated manner with the U.S. dollar.

Second, gold has corrected from its pandemic highs and the price has hovered between $1,700 and $1,900 for most of this year. But gold's inability to recover in an environment of rising inflation may have been triggered by a strong dollar. After all, the U.S. dollar has been the star currency of the year, winning against all its G10 peers.

And that's what it has done against gold.

To summarise, this is not the first time gold has acted with a lag, and all the market needs is a weaker U.S. dollar. Bulls may want to wait for the price to rise above $1,900 before going long, targeting new highs. On the other hand, a drop below $1,700 would invalidate the bullish case.