The question that everyone wants to know is, ‘where is the gold price going next?’
I’ll focus on technical analysis to answer this question but first, it’s important to understand why people buy gold.
People typically buy gold for three main reasons:
- Protection from inflation
- Protection from economic contagion risk
- Diversification
Generally speaking, asset price inflation is the only form of inflation witnessed since the great financial meltdown of 2008/09.
To solve the debt problems, the US Federal Reserve began printing money in 2009. Since this date, the US S&P 500 is up over 150%. Real estate markets around the world have recovered and bond prices are up.
As a result, you have seen people exit their positions in gold and bonds in favour of buying equities.
This is a worldwide trend.
There is a growing belief that the US Fed and other central banks can save us all by printing money. Therefore, the perception of further economic contagion risk is lower. That’s even though the next crisis will likely be larger than the US Federal Reserve can handle.
The economic contagion risk has been lower since mid-2012 when Europe came up with a plan for its debt crisis. By the way, this is when the gold price began to reverse.
On the 26 July 2012, President of the European Central Bank, Mario Draghi said he would do ‘whatever it takes’ to save the euro. In other words, they will print as much money as they have to.
Since this date, gold has fallen 38% to its low and it has been on a short term down trend ever since.
It’s important to understand that even though gold fell by 38% from its all-time high, the gold price went up for over 12 years straight. It went up 650% from July 1999 to September 2011.
Furthermore, during the 1970s bull market in gold, the precious metal increased 2,329% from a low of $35 in 1970 to a high of $850 in 1980. However, during that time, there was a period of 18 months in which gold fell nearly 50%.
The point is, this gold bull market is only halfway done! But gold is still going through a correction because asset prices don’t go up in a straight line forever.
Let’s dig deeper into the technical analysis.
The technicals show that gold is in a long term uptrend.
The most important signal is that gold has not broken through its ‘long term up-trend’. This long term trend started near the 2001 all-time price low. In fact, the recent correction saw the gold price bouncing ‘perfectly’ off the long term up-trend line.
Interestingly, around this time, gold found support at the 2010 resistance level for the second time. This is known as a double bottom, which is a long term bullish indicator. I’ve shown this in the above chart as the ‘current major support line’.
This indicates that, assuming gold doesn’t fall to a lower price, the US$1,180 level could potentially become the future long term price bottom.
Nonetheless, gold needs to break through its major ‘price resistance level’ of US$1,400. Throughout this year, it’s tried hard but with little success. If the gold price did break and hold the $1,400 level, it could be a signal that the next phase of the gold bull market has officially begun.
At the moment, gold seems to be forming a price consolidation between $1,200 and $1,350.
I like to see periods of consolidation because it means that information is being absorbed into the market.
Due to the consolidation, the long term price uptrend is forming with the short term down trend. This is known as a pennant.
The long term gold chart is showing a bullish pennant at the moment.
Despite this positive sign, I’m hesitant and believe that gold could still move either way as it’s still in a consolidation phase and in a short term down trend.
I won’t become bullish on gold until it breaks through and holds the US$1,400 level. If we experienced a 50% retracement, similar to the 1970’s correction, the price of gold could fall to around $970 per ounce.
The bottom line is:
- If gold breaks US $1,400 and holds it’s a bullish signal
- If gold continues to trend down below $1,300, this is bearish
- If gold breaks$1,200, it could set a new price low.
Jason Stevenson+
Resources Analyst, Diggers and Drillers
