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Gold Moves Back Above The $1800 Level

Barchart - Sat May 28, 2022

On May 16, June gold futures reached a low of $1785 per ounce. On May 14, in an article on Barchart, I wrote, “While hold has retreated from the early May 2022 new all-time high, the technical and fundamental cases for the metal remain compellingly bullish.” Since May 16, gold has worked its way higher and was at the $1845 level on May 27. Gold faced falling stocks and bonds and a rising US dollar, a typically toxic bearish combination for the precious metal. However, there is nothing ordinary about 2022, as the economic and geopolitical landscapes have been treacherous. Gold has been a go-to asset throughout history during troubled times, and 2022 is no exception. Gold was resting at the $1850 level on May 27 after surviving the brief move below the $1800 level. 

Gold finds support after the correction from the May 2022 record high

Gold’s correction from the March 8, 2022, record high to the May 16 low took the precious metal 14.3% lower. 

The chart highlights the drop from $2082 to $1785 on the active month June futures contract. Gold made a marginally higher high than the August 2020 peak, where it ran out of upside steam. 

Gold is a hybrid somewhere between a commodity and a currency. Commodities tend to be highly volatile assets, while the price movement in the leading currencies is far less dynamic. Gold’s volatility tends to be higher than currencies but lower than other commodities. Meanwhile, the most recent correction took gold below the $1800 per ounce level on May 13th and 16th, when the price recovered to over the $1800 level and was sitting at $1850 at the end of last week. 

$1780-$1800 is the critical support level

Two years ago, in July 2020, gold began to embrace the $1800 per ounce level as a pivot point for the nearby COMEX gold futures price. 

The chart highlights that the $1800 level became a pivot point throughout most of 2021.  Since July 2020, the continuous gold futures price has been as low as $1,673.70 and as high as $2,072, with an average at $1,872.85 per ounce. June gold futures were around $20 below the average on May 27.

While global political turmoil and inflation at the highest level in over four decades support higher gold prices, rising interest rates and a stronger US dollar have weighed on the precious metal. At the end of May 2022, bullish and bearish factors continue to pull gold’s price in opposite directions.

The $1800 level was a pivot point throughout 2021, and in 2022 it could emerge as the critical technical support level as gold continues to make higher lows and higher highs. 

Gold mining shares have outperformed gold since the recent low- A bullish sign

June COMEX gold futures fell to $1785 on May 16. On May 27, the price closed at the $1851.30 level, 3.71% higher. 

The GDX and GDXJ ETF products hold portfolios of senior and junior gold mining companies. 

Gold mining companies tend to outperform the price action in the futures market on the upside and underperform on the downside on a percentage basis. 

While COMEX gold futures reached the $1785 low on May 16, gold mining shares reached their lows on May 12 as they were one step ahead of the metal. 

The chart shows the senior gold mining ETF product (GDX) rallied from $29.66 on May 12 to $32.51 per share on May 27. The 9.6% gain outperformed gold futures since the mid-May low. 

The junior gold mining ETF product (GDXJ) moved from $35.08 on May 12 to $39.87 per share on May 27, a 13.65% gain. Since junior gold miners tend to offer investors more leverage than the senior miners, GDXJ outperformed GDX, and both mining ETF products outperformed the gold futures since the mid-May lows. 

The mining share’s outperformance is evidence that gold’s path of least resistance was higher as of May 27. 

Gold’s role as a currency is rising

Sanctions on Russia and Russian retaliation isolated the country from the global financial system. After Russia invaded Ukraine, the Russian rouble plunged, but it made a significant comeback after Moscow announced that 5,000 roubles were exchangeable for one gram of gold. 

The chart illustrates the fall and rise of the Russian currency against the US dollar as the rouble reached a low on March 21 and has been trending higher since it hit bottom. Backing the currency with gold supported the rouble, sending a signal to China. 

Over the past years, Russia and China have been high-profile gold buyers, vacuuming in domestic production and purchasing gold on the international bullion market. Increasing gold reserves allowed the Russians to declare their currency had a gold backing, and the move increased gold’s profile in the worldwide financial system. 

China’s “no-limits” support agreement with Russia could lead China to follow the Russians and back the yuan with the precious metal. The geopolitical bifurcation with China and Russia on one side and the US and Europe on the other could lead to moves to undermine the US dollar’s position as the global reserve currency. Backing the rouble and yuan with gold would pressure the dollar, a purely fiat currency. 

Geopolitical tensions are increasing gold’s role on many levels. War and hostilities tend to lead to gold buying but backing currencies with the metal adds another dimension to its position as the ultimate form of money. 

Cryptos have not replaced gold

As Bitcoin and other cryptocurrencies rose in 2020 and 2021, supporters declared that the burgeoning asset class would replace gold as worldwide currencies and reserve and investment assets. However, the decline from nearly $69,000 per token on November 10, 2021, to below $29,000 on May 27 has taken the shine off the asset class. Over the same period, June COMEX gold futures have been virtually unchanged as they closed at $1853.50 on November 10 and $1851.30 on May 27. 

Gold has been the ultimate money form and a store of value for thousands of years, and that does not appear likely to change anytime soon.

I view Russia’s move to back the rouble with gold as a test case that could cause other governments to realize the fiat currency system’s days could be numbered. Gold is the most likely candidate to provide backing to the world’s foreign exchange instruments. 

Gold’s bull market is over two decades old, and it shows no signs of faltering. Since 1999, every significant correction in gold has been a buying opportunity. I am a buyer of gold on price dips as the metal’s prospects continue to shine. 

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