The Critical Price Level for Gold

The volatile gold price has caused more than a few headaches.

The price surges have drawn in eager punters, but the rallies haven’t been sustainable. Without a sustained break higher, more people are starting to become disenfranchised towards the yellow metal.

Gold came up, as it tends to, in a conversation with a friend over the weekend. He doesn’t invest in shares and is looking to buy property. I was explaining how asset classes move in and out of favour over time.

For example, commodities were popular…and now they aren’t. Emerging markets were expensive…and now they’re cheap. The same is true for property. It’s been — and remains — hugely popular with investors. But I believe that property will move out of favour within the next decade. A portfolio of gold shares should offer significantly better long-term rewards.

His response: ‘…but people have been saying “buy gold” for years!’ Like many others, my friend wasn’t convinced.

Lots of people are starting to view gold as an ‘overhyped’ asset class. The talking heads on TV, who always say buy and never sell, have destroyed morale. With the lack of appetite towards the sector, a major price capitulation could be around the corner.

That is, unless gold surges through — and holds above — US$1,300 per ounce. That’s a critical level for the yellow metal.

A price level for gold worth noting

The Sydney Morning Herald reported yesterday:

‘…Research by ANZ forecasts the gold price will “push past” $US1300 ($1700) an ounce over the next year.

It’s a handy gain compared to the price range where the precious metal has mostly been trading during the past 18 months, where most of the time it’s been well under $US1300 an ounce. At one point last year it plummeted towards $US1100 an ounce, while recently, it’s been bouncing around the $US1250 an ounce mark.

I’m not sure who ANZ’s analysts are trying to impress with their forecast. US$1,300 per ounce was already hit this month and has acted as major resistance for years.

Resistance highlights the tops of range-bound markets, mind you. The US$1,300 per ounce resistance level has been around for some time.

Take a look at the daily gold chart below. The red line shows the resistance level in question.

daily gold chart
Source: Seeking Alpha
[Click to enlarge]

In 2015, gold declined from the key level to hit $1,040 per ounce in December. The year was marked by multiple false starts from the US Federal Reserve. The Fed tried to raise rates three times that year. The market got spooked each time and the Fed back-flipped. The story continued until the last month of the year.

2016 started in a similar manner. Yet, despite a few decent price swings, things didn’t really heat up for gold until 24 June. That’s when the Brexit vote took place. The yellow metal surged US$100 that day, breaking through US$1,300 per ounce.

But it was another false start. The price fell straight back down…

Gold bugs were celebrating a few months later though. US$1,300 was hit again on the US election day last year. Donald Trump’s win surprised lots of people and put a rocket under the price…briefly.

The story hasn’t really changed this year. It’s been a rocky ride for gold.

Despite threating to make lower lows in the year, gold hit US$1,300 per ounce this month. The UK election nearly produced a major upset. Geopolitical tensions in the Middle East also aided the price rise.

US$1,300 is a key resistance level to watch. And it has been for some time. Indeed, ANZ Research’s forecast really isn’t that ground-breaking.

The future for gold

The Sydney Morning Herald article continued with the bank’s analysis:

‘…But a more eye-opening conclusion in the research is the forecast that the gold price will rise above $US2000 an ounce by 2025.

This is our central case for the gold price. While prices may trade only marginally higher over the next few years, we believe the combined effect of greater demand from investors and central banks will see gold prices rise over the long term,” the report said.

The report, by ANZ senior commodity strategist Daniel Hynes, outlined a case for why gold had good prospects in the short term, and a lengthy and persuasive case for why it had “positive long-term prospects as well”.

In the short term, it cited rising political uncertainty and “rising geopolitical risk providing strong support for gold”, despite the prospects for higher interest rates in the US. Long term, rising wealth across Asia was expected to “drive demand for physical gold for some time”, it said.

One fact is crystal clear. Regardless of the demand and supply analysis, which really doesn’t make a difference for gold, the yellow metal must close above US$1,300 per ounce on a yearly basis. That would signal that gold should experience better days ahead.

Remember, when a strong resistance level breaks and holds, it should become support. That ultimately holds up the market during the next run. In other words, when the gold bull market actually starts, the price will struggle to fall under US$1,300 per ounce. It may never even get below that price again.

As I told my friend over the weekend, property is all the rage right now. But if you’re looking for long-term value, a portfolio of the best gold shares will be hard to beat.

Regards,

Jason Stevenson,
Editor, Markets & Money


Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:


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