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Amongst all the talk around Silver's (XAGUSD) recent rally, Gold (XAUUSD) has been quietly setting up to explode higher.

Here we break down the short 3-step case for Gold $2200 this year:

1) Real Interest Rates Collapsing

Gold (XAUUSD) is inversely correlated to Real Interest Rates and we now see Real Interest Rates breaking down once again. This is a continuation of the prevailing Bear Market in Real Rates and the printing of a new lower high, and the establishing of new lows, is an early indication that a rally in Gold (XAUUSD) may be just around the corner.

FRED

2) US Dollar Index (DXY) at Key Resistance

The DXY still remains in an overall Bear Market despite the near term correction to the upside. A reasonably clear 5 wave count from the previous leg down marks the 91.01 as a key resistance level in the DXY since this represents the end of the previous wave 4 of one lesser degree. This is a common turning point in both Bullish and Bearish trends raising the odds of a reversal lower in the DXY in the near term. In the previous FOMC meeting the Federal Reserve committed to "using its full range of tools to support the US economy" meaning a further decline in the DXY has the wind of the Federal Reserve in its sails.

US

3) Gold (XAUUSD) Bottoming Out

Finally Gold (XAUUSD) itself has formed a Bullish Reversal Pattern within an even bigger Bullish Reversal Pattern.

Gold is currently trying break out of an established Inverse Head & Shoulders Pattern which sits in the right shoulder of a much larger Inverse Head & Shoulders Pattern meaning a significant break above the smaller patterns confirmation point of 1875 could set in motion a cascade of momentum, driving price towards the larger breakout level of 1960. A confirmed break above this level projects $2150 to $2200.

Gold

Timing

It is worth noting that Gold (XAUUSD) has yet to break, with any significance, above the 1875 confirmation level of the small Inverse Head & Shoulders Pattern. Whether it breaks higher after the recent probe into this level, or whether it continues to correct in the near term, either way this market and some of the key drivers behind it are aligning to threaten a major Bullish breakout in the near future.

As always there are no guarantees in the markets, but this asset is shaping up as one to keep a very close eye on.

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