LOGIN JOIN SHARECAFE SIGN UP FOR OUR NEWSLETTER ADVERTISE
share cafe logo  
 
SHARECAFE COMMENTARY

Get Ready For The Next Gold Bull Market
BY SHAE RUSSELL - 23/01/2018 | VIEW MORE ARTICLES BY THE DAILY RECKONING

With 2017 behind us, gold is clearly in a bull market. In fact, I believe it’s primed to climb to new levels over this year and next.

If my analysis is correct, in a couple of years’ time we might never again see gold below US$1,400 (AU$1,759) an ounce.

And that’s in spite of the US Federal Reserve Bank suggesting it will raise rates two or three times this year.

Most people assume gold only goes up in times of panic or confusion. Furthermore, as interest rates rise, gold should therefore fall, as investors opt for higher-yielding investments like bonds and stocks.

Gold does drastically rise in times of uncertainty. However, it stealthily moves higher in calm markets too. Often even against a backdrop of rising interest rates.

As the economy hums along, people don’t pay attention to the ‘fear’ metal if stocks are up.

Have a look at this chart:

Federal rate increases versus spot gold price in US dollars (2004–2006)

Federal rate increases versus spot gold price in US dollars (2004–2006) | 22-01-2018


Source: Bloomberg and Sprott
[Click to enlarge]

What you see here, as denoted by the yellow line, is the gold spot price from June 2004 through to June 2006.

This two-year period saw the metal gain 62% as it climbed from US$385 (AU$483) per ounce to finish June 2006 at US$625 (AU$785). It peaked at US$730.40 in May 2006.

Now look at the red line. This shows every instance in which the Federal Reserve Bank met and increased the cash rate. During this time, the Fed raised rates from 1% to 5.25%. Yet the gold price still rallied.

The Fed is slowly beginning to increase rates to pre-crisis levels. And the stealthy price movement in gold is taking place again.

Check this out:

Gold moves up on rate rises

Gold Bounce on Fed Hike | 22-01-2018


Source: Bloomberg
[Click to enlarge]

Just like the 2004–2006 period, the yellow metal is reacting to Fed interest rate increases once again. Since the first rate increase from the Fed in December 2015, gold has risen 27.7%.

Granted, gold moved a much more impressive 62% higher in 2006. But that was a different environment. The gold price was still trading in three digits, not four. The price has doubled since then. So, while the gains might not be as big, we are still seeing a repeat of previous patterns.

Not long after 2006 came the financial crisis that crippled global markets, pushing gold above US$1,000 for the first time to a new high of US$1,917.90 (AU$2,410.78).

However, right now, we are without a crisis to send the gold price higher.

That’s OK. The Fed raising rates slowly is enough to give gold a small boost every few months.

In addition, there’s the tetchy geopolitical climate simmering away in the background.

The warmongering from leaders Kim Jong-un and President Donald Trump is providing solid support for gold.

It’s clear that gold is on an upward march. Have a look at this forming trend:

Gold price in US dollars daily/yearly chart

Gold price in US dollars daily/yearly chart | 22-01-2018


Source: CMC Markets
[Click to enlarge]

Trend lines aren’t that interesting. But they show you what gold is doing in this instance.

Since the December 2016 low of US$1,125 (AU$1,414) an ounce, the price of gold has been in a long-term uptrend.

Each time the gold price has fallen to a higher low, I have drawn a new long-term trend line, marked in red, blue, brown and purple.

You’ll notice that these lines are broken into two parts: solid and dotted.

The solid part of the line marks where the price was at that particular time. The dotted part represents the hypothetical trend line.

Over the past few months, I’ve watched the price of gold use the dotted lines as support.

However, last week I saw what was actually occurring: a rising Fibonacci ratio fan. That’s basically a charting technique used to help identify key levels of support and resistance.

Here’s what happens when you overlay the Fibonacci retracement fan over my current gold price chart:

Gold price in US dollars — Fibonacci ratio fan

Gold price in US dollars — Fibonacci ratio fan | 22-01-2018


Source: CMC Markets
[Click to enlarge]

What you see above is a Fibonacci retracement fan overlayed on my coloured support lines. On the right-hand side of the chart, you can see the Fibonacci percentage levels.

Importantly, however, the support lines over the past year show that the gold price is moving along in a consistent Fibonacci sequence.

This is a very bullish signal for gold.

In other words, this tells you that gold is getting ready to move higher. I suspect the gold price will rally to US$1,400 in the coming months. However, don’t be surprised if gold falls back a little bit from here.

I believe we’ll see gold start to ‘test’ the US$1,400-an-ounce level over the course of 2018. After which I suspect it will remain above US$1,400 indefinitely.

Come 2019, we may never see gold below US$1,400 again.

The gold bull market is set. The question now is how quickly it moves up.



View More Articles By The Daily Reckoning

The Daily Reckoning's mission is to look at the investment world and the financial world in a sceptical and contrarian way. To do that day in and day out and tell you honestly what we see, even if it isn't always popular. If you'd like to subscribe to an alternative look at the mainstream interpretation of events, join for free here.



 

SHARECAFE VIDEO


What are the current opportunities and key risks?

More video   

RECENTLY ADDED TO SHARECAFE


 › ,
 › Self Diagnosing Using Google Might Not Just Be For Hypochondriacs
 › Listen To This!
 › Has Medicine Only Just Begun?
 › What's Your Coffee Telling You?
 › CCP - Morgans rates the stock as Upgrade to Add from Hold
 › TAH - Credit Suisse rates the stock as Outperform
 › MHJ - Macquarie rates the stock as Outperform
 › Stronger USD Keeps Heat On Gold, Metals
 › Oil Rallies As OPEC Confirms Modest Output Hikes
 › Shares In Countdown To June 30
 › Diary: Local Jobs, EU Summit, US Housing
 › ASX Outshines Wall St Over The Week
 › Monday At The Open
More ShareCafe   

GET THE SHARECAFE BREAKFAST BRIEFING


Delivered free to your inbox before the market opens each trading day. Sign up below +