Gold’s overpromised and under-delivered for years. The yellow metal has been trapped in a six-year bear market.
Most punters have been burnt multiple times.
Watching gold move higher in 2016, though, the mainstream media has turned into a permanent bull. Some of the most famous investors in the world — Stanley Druckenmiller and Seth Klarman (hedge-fund industry giants) — have convinced them, arguing the bull market was back early last year.
It was a horrible call…
Despite the positivity, and similar to all the other rallies over these past six years, the yellow metal crashed at the backend of 2016. Most precious metal stocks nosedived.
OK, that’s all in the past. The important question now is: Are we back to square one today?
Gold has seen another great start to the year, and gold’s promoters are screaming that the bull market has started.
Don’t believe them. The gold bull market certainly hasn’t arrived.
What we’re seeing is a classic bear-market rally. But that doesn’t mean gold won’t go higher this month. On 23 January, I wrote that gold would head towards US$1,260 per ounce. Having now arrived at that target, gold could go easily higher during March.
Here’s why gold’s driving higher…
Mining.com reported on Tuesday:
‘Gold bears had been making big bets that Trump’s plans for fiscal stimulus, including a $500 billion infrastructure spending program, will lead to strong US economic expansion, higher interest rates and a more robust dollar.
‘David Wilson, head of metals research at Citigroup, tells Bloomberg TV, that gold should top $1,300 towards the end of the year as the “Trump reflation trade” reverses and subdued real interest rates, coupled with moderating dollar strength, provide “positive momentum” for the gold price.
‘Wilson says gold is also attracting buying over political concerns about upcoming elections in the Netherlands, France and Germany and the impact on the European Union.’
David Wilson is both right and wrong.
Gold isn’t rallying because of Trump. It’s surging over political concerns in Europe.
Geert Wilders — a far-right politician for the Party for Freedom (PVV) in the Netherlands — has vowed to call a Dutch referendum on European Union membership. That is, if he wins the election this month.
My friends in the Netherlands tell me that it’s going to be a tough ask. There are more than 30 political parties. The latest political poll (not that you should trust polls!) shows Wilders is slightly behind.
The main political party is 50PLUS. It’s aimed at the older generation who see their pensions at risk. The pension age — similar to Australia — is being raised. And many in this socialist nation are unhappy about seeing their government-guaranteed benefits slip further out of reach.
The Dutch Labour Party (PvdA) has long been a supporter of immigration. And with the nation already struggling with high immigrant numbers, Labour, too, is struggling.
The Greens are supported by Justin Trudeau — the Canadian Prime Minister. The Greens are doing alright, as Trudeau has painted himself as the next Barack Obama, who remains highly popular in the Netherlands.
Geert Wilders (PVV) needs a landslide victory to win — no other major party wants to form a government with him. If he wins, it’s another nail in the European Union’s coffin. That would also mean big trouble for the Eurozone. His victory would be an enormous boost for Marine Le Pen — the far-right French Presidential candidate.
The French elections are set for April. I believe Le Pen will win with a majority vote. Like we saw with Trump in the US, people are fed up with career politicians offering more of the same bleak future.
The German election is set for November. Angela Merkel will lose that election for the same reason. And, to top it off, if Greece doesn’t kick the can down the road once more, it might finally default on its sovereign debt in June. The International Monetary Fund and Germany have refused to provide more bailout relief.
The European Union and Eurozone are on the verge of collapse. It will happen quicker than anyone thinks. It’s no wonder that gold has rallied this year, and could go higher. Of course, that doesn’t mean gold’s ready to take off into a bull market…yet.
Technical analysis shows the true story
Take a look at the monthly chart for gold priced in US dollars:
Source: Tradingview.com; Resource Speculator
[Click to enlarge]
The top blue line — major resistance — shows the main downtrend line from the 2011-high of US$1,920 per ounce. Gold tried multiple times to break out above resistance last year. It failed every time. That suggests gold isn’t ready to take off just yet.
Remember, resistance is a technical ‘sticky point’. Prices tend to gravitate towards that level. If the price can close above resistance, it tends to break out higher. If not, it generally moves back towards support — another technical sticky point.
The gold price must close above the blue line on a monthly basis before it’s time to get excited. Major resistance now stands at around US$1,300 per ounce. For gold to move into a bull market state, it must close above that level, and last year’s high, on a monthly basis.
The lower blue line shows the major downtrend line that supports the market. Major support stands below US$1,000 per ounce. That’s not great. Remember, gold remains in a bear market. That’s why I keep warning gold could crack below US$1,000 per ounce.
But that might not happen for several months yet…or longer.
At the moment, the pink support/resistance line is the focus point. Gold tried to break above this level multiple times throughout 2014 and 2015. It couldn’t do it until last year. Interestingly, this level provided support for the market at the end of last year.
The pink line shows that gold must close below US$1,120 per ounce to move substantially lower.
It’s clear that gold remains in a bear market. But that doesn’t mean it will crash tomorrow. It can easily rally higher in the short term, moving between its limits.
Let gold prove itself
Take a look at the daily chart for gold priced in US dollars:
Source: Tradingview.com; Resource Speculator
[Click to enlarge]
The pink channel has contained this year’s rally. The bottom of the channel defines support at US$1,237 per ounce. A close below that should see gold reverse. The top of the channel stands at the US$1,300 per ounce level.
The blue downtrend line also shows resistance at US$1,300 per ounce. Although, the black down trend line shows resistance at the US$1,283 zone.
What’s that telling you?
If gold breaks through and closes above US$1,283 per ounce this month, we could see a rally towards the US$1,300 per-ounce level. That’s a possibility, given the political tensions over in Europe — especially with the election in the Netherlands on 15 March.
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Editor, Markets and Money