As far as gold goes, I would describe myself as cautiously optimistic.
Let’s not beat about the bush. I now have a target of US$1,425 an ounce and I’m hoping to see it by May. My stop is just below $1,275. If I’m wrong, I stand to lose about 30 bucks.
Several factors have led me to this target.
First, gold seems to be having one of those years where it follows the seasonal patterns. That is, a strong January with a small sell-off towards the end of the month. Then a strong February with a peak towards the end of the month, followed by a nasty March.
If this is the case, then we should see a strong April and May, before another sell-off at the end of May and into June.
If we’re about to have a strong April and May (and the signs so far are good), then last week’s March low of $1,277 should hold. That means we will have put in a higher low than the $1,180 that began the year.
Interpreting this as a small uptrend forming, I’d pitch for a higher high than the February peak of $1,392.
Which leads me to the next big level of resistance at $1,425.
However, if $1,275 doesn’t hold, then my interpretation that we’re seeing a small uptrend forming is wrong.
You’ll notice I’m taking a much shorter-term view of gold at the moment. There is a reason for this. If you asked me where gold is going to be in a couple of years, I’d find it hard to give you a strong opinion.
Without wishing to sound trite, there are so many contributing factors to the gold price that seem to be in a state of indecision. Has the US stock market peaked, or is it just catching its breath? What about the bond market – will interest rates rise, as everybody says they will — or will they fall, as they actually have done this year? What about the dollar? It’s right in the middle of the trading range — is it going to break up or down? And the pound — is $1.67 the high, or just a temporary barrier on its way towards $2.00?
Inflation has found its way into the London housing market, as well as into financial assets. Will that inflation stay contained — or will it spread? What about next year’s general election — which way is that going?
These are all, at least in my mind, unresolved questions, which will affect British buyers of gold in some way. Even gold itself seems undecided. Are we at the start of another bull market? Are we still in a bear market? Or just meandering about on the way to nowhere?
Gold isn’t going to $2,000 this year — but I don’t see it falling below $1,000
In gold’s 1971-80 bull market, gold rose from $35 an ounce in 1971 to $200 in 1975, fell 50% back to $100, and then marched up to $850 by 1980. The gold owner in me wants to interpret the last two years as gold’s ‘75-‘76 moment. But the cynic in me won’t believe it until we see it.
I was at the (terrific) UK Investor Show last weekend, discussing the outlook for gold with various bods from the sector. Some of the panellists were excellent, I thought — Amanda van Dyke of Women in Mining, in particular.
But another was proclaiming gold bug guff that was so generic and regurgitated that, when he declared that we will see $2,000 gold by the end of the year, my first instinct was to take the opposite stance and say gold will fall through a thousand.
Barring some extraordinary event, like some genuine numbers from China about their gold reserves, gold will not go anywhere near $2,000 this year. I’d be surprised, albeit nicely, to see it even reach $1,500 ($1,475 is my target high for the year).
However, I doubt it will fall through $1,000 either. And if it can start gently rising here, put in a series of higher lows and higher highs over the next few months, then a strong base will have been built. In the meantime, clearer trends will be becoming apparent in all those other markets I mentioned above.
I’m hoping that over the next few months we’ll have a better idea if governments and central banks really did save the economy — or if all they did was kick cans down the road. That’s a question that will determine gold’s direction and how much of it to own.
Gold’s shorter-term gyrations will give a clue as to what that answer will be. I guess, subconsciously, that’s why I am following those gyrations so closely.
Dominic Frisby
Contributing Editor, Money Morning
Ed Note: This article originally appeared in MoneyWeek.