The article was written by Patrick Brik
Gold (GLD) has experienced three years of relentless selling as equity markets have climbed to all-time highs. A general sense of doom clouds the precious metal with pundits calling for sub-$1100/oz in unison. However, I believe the majority are overlooking the fact that gold has failed to trade lower even as numerous technical and fundamental events have presented themselves. With gold standing firm against the bearish pressures, I believe bullion will reverse its 6 month trend and hit $1550 in 2015.
Theoretically, gold should have already traded much lower given these events:
- Price of gold breaching below 1180
- USD appreciating and the Fed’s hints at interest rate hikes
- Oil crash
Gold price traded at 52 week lows of $1143 in early November 2014 on the news that the Fed stopped QE. The precious metal quickly bounced from these lows indicating the start of a counter trend. Gold price, in terms of foreign currencies like the Yen/Euro, is trading around 52 week highs. Additionally, Gold Bugs Index (HUI) has reached a level of long term support. These support my thesis that gold will trade higher, reaching my target of $1500 in 2015.
Gold Price Breaching $1180 – Technical Perspective
From a technical perspective, we have seen a similar setup in mid 2012-2013 when gold price collapsed from $1800 to a low of $1180 (below). Markets have been keeping a close eye on this $1180 level, waiting for a similar sell off.
Gold breached the $1180 support in late 2014 and many were calling for a collapse similar to what the precious metal experienced in 2013, when price fell below the original $1550 level (above). This however has not occurred as gold has stabilized quickly.
As gold resists lower prices, long term momentum indicators are beginning to show signs of reversing (below). The 100 month moving averages are creating price support at $1180. More significantly though, divergences between prices and momentum have developed. These divergences are suggesting that the bearish momentum in precious metals is slowing.
It should also be noted that the failed technical pattern below $1180 may be a false break that could, in fact, influence a reversal to the next highest level of $1550.
Foreign Central Banks Boost Asset Purchasing as US Fed Ends
The USD is currently in its 7th straight month of gains (below). These gains can be attributed to the ending of the Feds QE policy, with a return to a normalized monetary policy. With the US economy showing some signs of stability, the Fed has hinted at increasing interest rates in the near future. As a result, gold, a non-interest-bearing asset, should see diminished demand.
Historically, the dollar and gold have been negatively correlated. Fundamentally, this theory adds up as the precious metal acts as an inflation hedge and a “flight to safety” investment alternative. Therefore, the currency’s strength should have, fundamentally, caused gold prices to trade below the $1180 level mentioned above.
Price crash in Oil
Since summer of 2014, the price of crude oil (WTI) has crashed. Global supply glut has influenced a massive selloff in the commodity. For gold stakeholders, the 50%+ cut in oil prices and rise of USD will mean lower gold production costs and an erosion of the appeal of gold as an inflation hedge. This weakness seen in oil though has not shifted to the precious metal, which leads me to believe that gold will be able to weather this selling pressure.
Evidence of Trend Change
In 2011, when gold peaked at USD $1900, it also peaked in other major currencies including the Euro, Yen and Pound, to name a select few. The relationship is different this time around. When gold is priced in terms of the above currencies, the precious metal is trading at new 52 week highs. I have only included charts of the Euro and Yen, but similar patterns are apparent in the other currencies listed.
While the US is hoping off the asset purchasing programs, foreign economies are intensifying their buying. Japan will increase their balance sheet by 15% of GDP/annum and will extend average duration of bond purchases from 7 years to 10. Additionally, Europe’s deflation risk has left the EU with little options but quantitative easing. The strength of foreign currencies is expected to further depreciate, a bullish signal for gold prices.
Long term indicators, such as RSI and momentum points of inflection, are suggesting the price of gold, in terms of foreign currencies, will rise. The two discussed currencies make up the two largest components of the US dollar index, a combined 71.2%. This could be suggestive of a similar rally occurring to the price of gold in USD.
Gold Mining Indexes Long Term Support
Since gold’s peak in mid – 2011, miners have fared much worse than the commodity itself, retracting down to the 2008 lows of the financial crisis. This area acts as a key support level. The monthly MACD momentum indicator shows that the selling momentum could be changing with a positive divergence.
The Junior gold miners ETF (GDXJ) is showing record trading volume at these low prices. This could be best interpreted as accumulation. Weekly momentum indicators are about to swing bullish, as monthly indicators are still on their bullish MACD cross. Traders refer to this as a buy signal on many time frames and can lead to impulsive wave structures (below).
The above points lead me to believe that gold’s safe haven status maybe reasserting itself in 2015. My initial targets are at $1520-$1550. In such a scenario, the miners will rally significantly.