Bofa Warns: Gold is About to Crash to $3,500 (And Possibly Lower)!

Bank of America warns gold is headed for a massive correction to $3,500. But while most investors are focused on inflation, they're missing the real driver. It's central banks and real rates. Now is B of A going to be right or just the ultimate contrarian trade of the year? Let's dive in. Because back in October of 2022, gold bottomed out and went on a massive rally. And this is something that many people that trade it are saying is just the beginning of what's going to be a huge surge in gold prices due to inflation, central bank money printing, and massive government deficits. But the real driver behind it has everything to do with this next chart. And what we're looking at are real rates. And this is really what's driving gold. The proof? Well according to BNP, inflation fears have traditionally been seen as a source of support for gold. But markets now focus on the interest rate implications of higher inflation expectations rather than assessing inflation in isolation. So what they're looking at here is the ability for central banks to respond to rising inflation. And if they do by raising rates, then that is super bullish for gold. But if they can't, then all of a sudden, the real driver says, gold is going down. And here's the evidence. This helps explain why gold prices have struggled in the face of energy shock driven price pressures that have prompted a shift in Fed rate calls. Because what the market is saying here very clearly is we don't think the Fed can respond in kind to rising inflation without crushing the economy and the labor market. But in the short run, the market implied chance of a quarter point hike later this month. This is next week. The Fed is mean has climbed to now about 50% from less than 10%. And I think Warsh is absolutely going to hike rates. He has every good reason to. The market is telling him, yes, you can hike rates. But he also wants to come out and show that the Fed is going to be tough on inflation. To do that, you've got to drive the funds rate higher. And you can see that two year yield exceeds the Fed's policy rate by a widening margin. So not only are the Fed fund futures saying the Fed is going to raise rates, what we're seeing in two year yields is a clear sign that the market is giving the green light to Warsh to raise rates. Let's take a look at some history here, because when we look at the federal funds rate in blue against two year yields in red, you can see very clearly that every rate hiking cycle was led by a rise in two year yields ahead of the Fed. So what we're seeing here is the market is once again telling the Fed that, yes, you can absolutely raise rates. The problem is we're facing is inflation can rapidly outpace the Fed's ability to hike rates. And we talked about this in yesterday's show, how we're running out of oil. We could see gas prices surge, and that would take inflation straight up. The Fed would have no ability to respond. But let's talk about this driver of real rates, because what is real rates? It is the funds rate less the consumer price index. I want to give you some evidence to show you just how much this drives the price of gold. Let's go back to 2004. We can see that real rates were negative. That's any time they're below that horizontal black line. And they rallied and then stayed positive all the way up right into early 2008. Let's take a look at this chart. This is GLD. This is right off my trade screen. And what happens? You go back to 2004 and you see a massive bull market in gold right up until the point where real rates went negative. Now let's move forward. How about going into the financial crisis? We see gold dropped and then it rallied back. But what happened is real rates started to surge higher and then they flipped over. Now gold continued to go on a tear here. And you're saying, wait a minute, Steve, real rates, maybe they don't matter. But they do. Because what was the Fed doing then? Something called quantitative easing. And what did the Fed say? It was money printing. And at the time, everyone believed it. But as we know now, it wasn't really money printing. But nevertheless, it drove gold prices higher until, of course, they came into the next correction. Now, before I get to that next chart, if you're saying, all right, Steve, what do I need to do to position my portfolio for what's happening in real rates? How do I trade this to make money on it? How are you positioned? What are you doing? Well, I've got two amazing trading systems. One called CTA Timer Pro, where we trade against the machines. The other called Momentum Timer Pro, where we trade against momentum indicators. And in both reports, I give you tips on your portfolio. I tell you how I'm positioned, how I'm looking at the markets. Plus, you get some amazing trades. In fact, many of my subscribers are already long oil and we're watching a ton of other indicators right now. Now, to get involved, all you need to do is grab those links in the description below, sign up, use a coupon code for your free 30-day trial and start getting ahead of what's about to hit the markets. I'll see you there. Now, let's fast forward to the next big time we see real rates go positive. It's right around 2019. And what happens with gold? Well, as you can expect, it goes on a massive rally. But the next move, the pandemic, what do we see? We see real rates right around 2023 start to break higher. The market's expectation is they're going to turn positive and stay positive for quite some time as central bankers all over the world are hiking rates. And sure enough, that's where you get this monster rally in gold. You can see the timing of it is nearly perfect. And now everyone's expectation is gold's going to go a whole lot higher. The problem is when we look at real rates, it's starting to tell us something is really wrong here. And what's wrong is they're starting to turn negative. And we've seen in the past that a move in real rates turning negative is very bearish for gold. And that's why you start to hear calls from Bank of America say, look, we think that gold prices can go down because it's not about inflation. It's again, it's about the Fed's ability to respond to it. And the problem right now, as we look at the fact that we have about 42 days left in oil before everything runs dry, what does that mean? Crude oil prices shoot higher, gas prices go up. And when you look at the relationship between the consumer price index in blue against U.S. oil formations, gas price in red, we can see the gas price is likely to go higher. And in the short run, it's going to take consumer prices up. The problem is the Fed will not be able to respond. And that's the real issue here. So let's dive into Bank of America's bearish call on gold. And then we're going to look at the bull case here. And then I'm going to show you some ways that you can trade this. Because right now, gold bulls see structural support. Bears see a chart that's screaming lower. Your take? We'll put it in the comments. Because according to Bank of America, gold is now in a downward channel. It has a death cross. And that means, well, it's going to go down even more. But however, one technical indicator they're looking at, it's called the TD sequential, suggests price may turn higher. Well, let's take a look at that chart here. And yes, this is a lot of lines. There's a lot of stuff going on here. But let's simplify it. Gold is in a downward channel. And according to Bank of America, it means it's going down even more until it touches somewhere along the bottom end of this channel. Now, this death cross they're signing, the cap in right here, this is when you see the 50-day moving average cross below the 200-day moving average. And according to Bank of America's technical analysis, this is super bearish. And this means price is going a whole lot lower. And that's why Bank of America is saying, look, we think support's at $3,500 because the channel line has been pivotable since 2000. It's been highly reliable. And what it suggests is support is hitting right around $3,500. Well, let's take a look at their chart. And then I'm going to show you another chart that if you're bearish on gold, it's going to put a smile on your face. But if you're bullish, you're not going to like what it says. And real rates is validating all of this. And then we're going to take a look at the bull case. And here you can see starting right around 2000, gold enters this channel. And this is what B of A is saying is support. And support is right here at $3,500 at the top of the channel. There's one big problem. You can see that it does actually touch the bottom of this channel from time to time. And if it does, well, it means it's coming all the way down here. How far could that be? What if I told you somewhere around $2,700? Now, I know what you're saying, Steve, there's just no way it could possibly do that. But let me show you the technicals here because they're actually suggesting that that is actually a possible outcome. Let's take a look. Because here is a chart of gold. You can see right now it's got support right around $4,000 an ounce. And if you draw a horizontal line along here, you can see what clearly looks like a major topping pattern. Now the bullish cases, it's going to rebound and scream right off of this level of support. And that's what everybody's hoping for this long the metal. But there's a problem because if this chart pattern breaks down below $4,000, what happens is you get what's called a topping pattern. Now, the way you read this is you measure from that horizontal line all the way up to roughly around the peak. Now, I'm going to say that was right around, say, $5,400. And then you take that move, that's $1,400, and you subtract it off. And that takes you right somewhere around $2,600 to $2,700. Could you imagine gold prices going down that much? Well, if you go back and look at that chart the Bank of America had, it suggests that if it does touch the bottom of that channel, that that price is actually validated. The only question here is, are we going to see a case just like the financial crisis where we see inflation surge higher and the Fed have to cut rates because the labor market weakens? If that happens, then all of a sudden, the $2,700 case is not that far-fetched. But let's talk about the bull case here because a lot of people are saying, no way that's not going to happen. Steve, you're totally wrong here. Look, I'm just telling you what Bank of America is saying and giving you the data that supports it. But now let's look at the bull case here because according to fund managers, this is one of the biggest contrarian trades of the year. It's called going long gold. And according to the Bank of America's latest fund manager survey, based on extreme positioning from fund managers, they're saying the best contrarian trades for a surprise hawkish Fed is nothing other than long gold. Now in the short term, that's absolutely right. But the problem is if inflation shoots higher from here, remember, inflation is a lagging indicator. So if our problem is our gas price is going to go higher faster than we see other prices drop, that's the question. And if we do, well, watch out. But let's take a look at what fund managers think here because what they're saying is this is most undervalued since March of 2023. And if we go back and look at some of the prior bull markets in gold, you can see the fund managers going into that big 2018 rally, they were all saying it was undervalued. How about the rally going after 2022? Remember, once again, for several years, they were saying it was undervalued. Now for one period, they're saying, look, we think it's undervalued. Is that enough to turn the tides? Are we going to see a bear market in gold here where fund managers continue to say it's undervalued, undervalued, undervalued before it takes off? But there is somebody that's a huge buyer in gold and it puts the price support underneath it. And everybody's saying this is the big reason we're going to see gold rally here. According to BNP, this March was the first time in 14 months that central banks switched to net selling of gold. The thing is, they're back and they're buying in a massive way. Let's take a look at what Goldman has to say. Because according to their now cast estimates, Goldman says that central bank purchases are at 81 tons for May. Now keep in mind, 61 tons per month was a three month seasonally adjusted average. And now when we go back to 2022, that average was a mere 17 tons. So you can see that central banks, they're buying like crazy and at levels we haven't seen them buy at for years. And that certainly puts price support underneath here and in a big way. And there's another factor, it's being driven by China. Because central banks are flooding back led by China's massive 48 ton purchase. Now, not long ago, I did a show saying, look, China wanted the price of gold to go down. Remember, they cut people's ability to speculate on it because they wanted the price to go down so they could buy a ton of it. And I know many of you said, Steve, that's not going to happen. Well, it did. And the problem is, if it goes down more, you're going to watch these central banks buy like crazy. But let's dive into some more data here. Because according to UBS, one of their strategists says that she believes that gold is consolidating as market participants continue to recalibrate rate expectations. So there you have, again, another nod to the Fed in response to fresh headlines and data. So what she's suggesting here is, yes, the Fed is going to raise rates, but inflation is not going to surge higher. If that's the case, then you can start to see a bullish case for gold to immerse. But if inflation shoots up and the Fed can't respond, watch out. And she suggests that underlying support remains in place right here at the 4000 mark, even if momentum has clearly cooled for now, especially when looking at the ongoing drop in ETF holdings. So what we're seeing in ETFs are people that were once extremely bullish on gold, where they're backing off their positions because it's not going up anymore. And that's one of those problems. When you look at these topping patterns and you draw your support lines, why do you see price drop after that? It's because people are tired of losing money and they see price continuing to drop and they want to sell. That's what you're seeing there. And Goldman goes on to say that they expect Fed-related headwinds to reverse over time, meaning they actually expect inflation to drop. And in that case, if inflation drops faster than the Fed cuts rates, then all of a sudden real rates go positive. Gold goes right back into a bull market. But again, the big issue here is all about energy. Because what we're seeing in the headlines right now is Waller remarks are worse than rate outlook, suggesting that, yes, the Fed is going to hike. But we think it's a one and done scenario. And let's go back and look at the data because I really want you to see what's going on here. And when we look at the federal funds rate in blue and overlay the consumer price index in red, I want you to understand this is the risk for gold. Because you go back to the last energy shock and what happens going into the financial crisis, the consumer price index was rising due to the fact that gasoline prices were headed higher. But what happened at the same time? The labor market started to break. Now that hasn't happened yet, but that's the risk we're facing right now. When that happens, next thing you know, real rates go negative and gold goes right down with it. The same thing happened in 2019. The Fed started to cut rates. Inflation headed higher. Again, bearish for gold. And now the risk is we're facing the same setup. If inflation continues to go higher and consumers can't afford it, well, what it's setting up for is gold to go in a bear market. And the problem is if gold goes and it keeps the correlation between the equity market, well, it means stocks are likely to go down too. Because having spent much of 2024 and 2025 in positive correlation with U.S. equities, BNP notes that that relationship has flipped back in 2026, but it could all of a sudden indicate that stocks are about to go down. So how can you trade this if you're thinking, wait a minute, where's the safe haven, Steve? You're saying stocks go down, gold could go down. Well, that means bonds could go down. Well, actually, if real rates go negative, check this out. Look at this chart of the 10-year treasury. It'll now overlaid against real rates. That's still shown in blue. And you can see period where real rates are dropping and interest rates go down. And why is that? Because it's telling you exactly the underlying issue here is that consumers can't afford higher inflation. And if the labor market breaks, the Fed can't respond to it in their normal tools, meaning the Fed has to start cutting into rising rates. And next thing you know, you see rates going down, gold going down, and stocks going down with it. So now you've got the setup. But the question is, are you bullish or bearish on gold? I'm Steve Van Meter. Thanks for watching. Thanks for being fans. Bye now.