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Gold- The Yellow Metal’s Slow Ascent In Early 2022 Hits A Roadblock

Barchart - Sun Jan 30, 2022

Gold shined brightly in 2020 as the price rose to a new record high, reaching $2063 per ounce on the nearby COMEX futures contract in August 2020. While gold rallied after central banks and governments flooded the financial system with unprecedented liquidity and stimulus in 2020 and 2021, gold had been rallying before the global pandemic, reaching all-time peaks in many currencies in 2019 and early 2020. Gold in US dollar terms made its move to the high in August, but it ran out of buying and passed the bullish torch to many other raw material markets. 

Last year was a very bullish period for the commodities asset class, but gold did not participate. After reaching a record level, gold digested the move and consolidated around the $1800 per ounce level throughout 2021. 

Gold remains far above its price at the turn of this century. On December 31, 1999, the nearby futures contract settled at $288.50 per ounce. The $1800 pivot point is over six times higher, as the bullish trend in gold continues in early 2022. 

Over the past weeks, the gold market had signaled that it could be ready to make a move in 2022. Consolidation can be healthy as it helps a market build cause to resume a long-term trend. If gold is going to challenge the August 2020 high, gold mining stocks are likely to outperform the metal. The VanEck Gold Miners ETF product (GDX) tends to act like gold on steroids on the up and downside. 

2021 was an inside year- 2022 could be a different story

In 2020, the nearby COMEX gold futures contract traded at a low of $1452.10 and a high of $2063 per ounce, a $610.90 range. 

The chart highlights the $286.20 trading band in 2021, with a low of $1673.70 and a high of $1959.90. The price range in 2021 was less than half the 2020 band, and gold did not make a higher high or lower low last year than the previous year. 

2021 was an inside year for the gold market as the price traded inside the 2020 trading range. Nearby gold futures settled at the $1827.50 level on December 31, 2021, 3.5% lower on the year. On January 28, the price was at over the $1850 level, as gold has edged higher so far in 2022. 

After a period where gold digested the move to a new all-time high in 2020 and consolidated inside the 2020 trading range over the past thirteen months, we could see a far more volatile year in 2022.  

The chart illustrates while gold continues to make lower highs since August 2020, it has made higher lows since March 2021. The wedge pattern is a sign of narrowing trading ranges, increasing the potential for a technical break higher or lower over the coming weeks and months. 

The long-term bull market remains intact

Nothing changed the long-term technical bullish trend in the gold market in 2021. 

The chart dating back to the early 1970s shows gold bottomed at $252.50 in August 1999. Since the turn of this century, gold has been on a bullish path. The precious metal rose to an all-time high in 2011 at $1911.60 and surpassed that level in 2020 when it reached $2063. The price action since the high has kept the bullish trend intact, with a wedge formation that could lead to another move to record highs sooner rather than later. 

Levels to watch in the gold futures arena

Medium-term technical resistance in gold sits at $1869.70, the mid-November 2021 high and most recent lower high. A move above the $1870 level would break the pattern of lower highs and could launch a technical rally in the gold futures market. 

Technical support is at the mid-December $1753.90 low, the latest higher low. A break below that level would be a technical setback for the gold futures market. 

Rising inflation, geopolitical concerns, and the long-term bullish trend favor the upside as we move into February 2022. However, a break to the downside may only mean that gold enthusiasts will need to be more patient before the yellow metal challenges the August 2020 high. 

Gold mining stocks tend to perform like gold on steroids

Gold mining shares tend to outperform gold futures during rallies and underperform during downside price action. The mining stocks offer leverage to the gold price without time decay as they are unlikely to cease operations at anywhere near the current price. 

Individual gold mining stocks carry idiosyncratic risk. Management, mine location, and other factors impact gold mining companies. I prefer a diversified approach to the gold mining sector, with a portfolio of the leading gold miners that mitigates some individual risks. 

A diversified approach with the GDX ETF

The VanEck Gold Miners ETF product (GDX) had a $11.815 billion market cap at $29.30 per share on January 28. GDX trades an average of over 24.8 million shares each day, making it a highly liquid ETF product. GDX charges shareholders a 0.51% management fee. The most recent top holding includes:

The chart shows that Newmont Mining and Barrick Gold accounts for 20.58% of GDX’s portfolio. 

Gold rose from $1452.10 in March 2020 to a high of $2063 in August 200 or 42.07%. 

While past performance never guarantees future results, the GDX ETF rose from $16.18 to $45.78 per share or 182.9% from March through August 2020. The ETF rose more than four times more than the metal on a percentage basis over the period as exposure to the mining stocks provided leverage during the bullish price move. 

I believe we are close to a breakout in gold. At $29.30 per share with gold at the $1786.60 level at the end of last week, the GDX is 36% lower than the August 2020 high, with gold futures down 13.4%. I view the GDX as a leveraged tool without time decay to position for those expecting a rally in the gold market. At the $1786.60 level on April futures technical resistance is $1883.30 with support at the $1755.40 level. The prospects for higher interest rates and the rise of the dollar index to the highest level since July 2020 are weighing on gold. However, inflation remains a clear and present danger, which could cause buying in the metal that is also one of the world’s oldest currencies. 

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