CEO’s Weekly Outlook – gold sounds the alarm

One of the dangers of staying close to markets is that we sometime fail to recognize major changes in the investing environment. At the end of last week markets saw a major shift, and investors should take note of the potential implications.

On Friday night the bubble in gold prices burst. Sparked by the US dollar strengthening on higher inflation data, the yellow metal traded through a $761 trading range on Friday night, the largest single day swing in history. Unfortunately for gold bugs, it closed toward the lower end of the range, completing a “blow-off top” formation that confirms the bursting bubble.

There are three clearly identifiable conditions for a bubble to pop. The first is an acceleration in the rate of price increases, so that the gains on the chart turn almost vertical. Gold fulfilled this condition when it added to recent gains by rallying from US $4600 to almost $5600 in just eight trading days.

The second condition is a version of the argument “it’s different this time”. The recently advanced notion that despite having more than tripled in four years, the gold rally was “only just beginning” filled that role.

The third condition is a blow-off top. There are many types of chart formations that qualify, but they are all reversal patterns occurring at the top of a sustained rally. In this case the reach for a new all-time high, and the rejection of that high, occurred in a single day. The next trading day saw the price plummet, confirming the rejection of the highs:

Gold futures - daily

How low could it go? Retracement analysis gives an initial target zone between $4000 and $4200, but overshooting is common in chaotic markets.

Significant changes like the popping of the gold bubble do not happen in isolation. Of particular note is the fact that Bitcoin plummeted at the same time, revisiting the lows of April 2025. This simultaneous drop in alternative investments to shares may reflect growing concerns about tighter monetary policy, spurred by persistently higher inflation.

Market watchers are arguing about the seeming absence of the market cycle. Rallies in risk assets and safe haven assets at the same time have confounded a conventional understanding of the economy, and investment theory.

The accommodation of central banks and governments is the key driver of this effect. Some argue that monetary policy IS the cycle, and that extraordinary liquidity is the reason that asset prices remain elevated.

If the sell-off in gold and Bitcoin represents a change in thinking about this liquidity, there are profound implications for share markets.

Rising inflation means that central banks cannot buffer economic weakness without risking severe economic damage. A sudden realisation - that if there is a market meltdown there is nobody to ride to the economic rescue - could be the reason that the longest bull market in history comes to an end.

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