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Is Gold on a Launchpad?

Barchart - Sun May 7, 2023

Gold is the leading precious metal. Moreover, gold is a hybrid, a worldwide financial asset, and an industrial metal with many applications. In my Q1 report on precious metals on Barchart, I wrote, “Gold is a special case—Expect new record highs.” Nearby June COMEX gold futures settled at $1,969 per ounce on March 31, 2023. In April and early May, the precious yellow metal has been consolidating with the $2,000 per ounce level as a pivot point. 

Gold’s bull market is coming up on a quarter of a century. In 1999, the nearby futures found a bottom at $252.50 per ounce when the U.K. foolishly sold half its national stockpile via an auction. Since then, every downside correction has been a buying opportunity, leading to new nominal all-time highs. The most recent record peak came in March 2022 at $2,072 per ounce. After correcting to $1,613 in September 2022 because of rising U.S. interest rates and the strongest U.S. dollar in two decades, gold has climbed higher and is now back on its bullish path to new highs. 

The $2,000 per ounce pivot point gives way to a new record level

On May 3, the FOMC moved the short-term Fed Funds Rate to the 2023 target at a midpoint of 5.125%. The statement and press conference told markets that the central bank would be data-dependent on future rate increases, but it remains committed to pushing inflation to the 2% target rate. The tone of the press conference and statement remain hawkish, but markets doubt the Fed’s perseverance. Meanwhile, the dollar index is sitting near its most recent lows at the 101 level, and the long bond futures above the 132 level are significantly higher than the recent lows and have made higher lows and higher highs. 

Gold spent some time trading on either side of the $2,000 level, which was a pivot point. The metal was already rallying when the FOMC increased the Fed Funds Rate by 25 basis points to the 2023 target of 5.125%. The previous all-time high in the continuous COMEX gold futures chart was $2,072 per ounce in March 2022.

The chart shows the rally that took the active month June COMEX gold futures contract to a new peak at $2,085.40 on May 4. 

Technical factors point to higher highs

The trend is always a trader’s best friend; even a novice technician can recognize the long-term bullish trend in the gold market.

After reaching a $252.50 per ounce bottom in 1999, gold futures have made higher lows and higher highs. While the continuous contract traded to $2,072 on May 4, creating a potential double top, the powerful nearly two-and-one-half-decade bullish trend suggests gold is not ready to stop appreciating.  

The reasons the recent consolidation could be a launchpad to much higher prices

Price consolidation can be healthy for markets. 

After establishing a bottom at the late September 2022 $1613 low, the chart shows gold traded around the $2,000 pivot point, consolidating from mid-March through early May, before moving to $2,085.40 on the June contract on May 4. The price was above the $2,020 level on Friday, May 5. 

Consolidation periods tend to give way to higher or lower prices, and gold moved to the upside after hugging the $2,000 per ounce level.  

Governments continue to go for the gold

Central banks validate gold’s role in the global financial system by holding gold as a reserve asset, and they have been net buyers. In 2022, the world’s central bank purchases rose by 152% from the previous year to 1,136 tons, according to the World Gold Council. In 2023, governments are buying gold at a record pace

China and Russia are the top gold producing-countries. 

Source: Statista

The chart highlights China led the world with 330 metric tons of output, with Australia and Russia tied for a close second with 320 tons of production. 

China and Russia are secretive about their gold ownership as the countries consider strategic reserves a national security issue. Given the global market’s appetite for gold, China and Russia are likely vacuuming domestic output and adding to their strategic reserves. Therefore, the actual gold buying is likely far higher than the reported numbers. 

Gold bullion, futures, ETFs, and mining shares could experience explosive moves over the coming months

The economic and geopolitical landscapes favor gold as the U.S. dollar’s role in worldwide trade declines. Gold’s two-and-one-half decade-long bull market looks set to continue to usher in new and higher highs.

The most direct route for gold investment is the physical market for gold bars and coins, but physical ownership involves storage and insurance. The CME’s COMEX division futures and futures options are highly liquid, but futures and options are leveraged and margined instruments, increasing risk. The GLD, IAU, IAUM, BAR, SGOL, PHYS, and other ETF products own physical gold bullion and do an excellent job tracking the precious metal’s price.

While many gold mining shares are available that move higher and lower with gold’s price, the individual companies involve idiosyncratic risks such as company management, specific mining properties, and geographical country risks. The GDX senior gold mining ETF the GDXJ junior gold mining ETF products minimize some individual company risks by diversification.

Gold’s positive trend continues in early May 2023, with bullish winds in the metal’s sails. The recent consolidation around the $2,000 per ounce level could be a launchpad that will take the precious metal to far higher prices. 

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On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.