Advertisement

The next five years will be better for gold than the last five were

Gold has done little over the last five years – people just haven’t been interested in buying it. But the omens are looking good. Dominic Frisby explains why.

180328-gold-b
The omens are looking good for gold

"Desire for gold", said the US stockmarket legend, Gerald Loeb, "is the most universal and deeply rooted commercial instinct of the human race".

Well, over the last seven years that universal and deeply rooted commercial instinct has been AWOL.

The general public just hasn't been interested. And rightly so. Gold has done little; the action has been elsewhere.

Advertisement - Article continues below

But nothing lasts forever, so today we ask is it time to be desiring gold again?

Gold's big problem for the last five years

Gold's all-time peak came in 2011 during one of several Greek crises: $1,920 per ounce was the high. It then spent a year or so not far off those lofty levels, re-testing $1,800 several times.

In 2013, however, it gave up the ghost and one of the most vicious bear markets ever to befall humanity began in the companies that mined, or claimed to be mining, gold, as well as in the metal itself.

This ended in late 2015/early 2016 for no apparent reason, beyond the facile observation that things had "gone too far". You were able to buy miners that previously had been valued in the billions with a fiver borrowed off a bloke round the corner.

Advertisement
Advertisement - Article continues below

We had an electric start to 2016. But since the summer of that year, things have gone to sleep again rather. The mining companies (royalty companies aside) have resumed their bearish trend, especially at the junior end of the scale.

Advertisement - Article continues below

Meanwhile, the metal itself has been eclipsed by just about every asset class there is, be that US stocks, emerging markets, oil, (some) base metals, battery metals and, of course, cryptocurrencies.

Of late, rather unannounced, gold has been creeping back up. But there's been a problem.

Gold ran into this problem yesterday. It ran into it in February; in January; last September; several times over the summer of 2016; and way back in March 2014.

That problem is $1,360 (or thereabouts). It's like Gandalf standing on The Bridge of Khazad-dm, declaring to the Balrog: "You shall not pass". As soon as it gets there or thereabouts, gold does what it's told and gold retreats.

As we say in the technical analysis game, there is a lot of resistance at $1,360.

Here's a chart of gold over the last five years.

180328-gold-price

(By the way, you may notice I'm trying out some new charting software this week thanks to the guys at Sharescope and I haven't quite got on top of it yet, but I'm getting there.)

Advertisement - Article continues below

The two red lines mark the $1,355 to $1,370 area. You can see that, with every attempt since 2014, gold has come down off this level like a balrog in flames.

What is promising about the most recent price action is the fact that the retreat has not been so pronounced. Whereas in 2014 or 2016 the attempts at this level met with sell-offs of $200 or more, the 2017 retreat was "only" $100 or so, but the 2018 pull-backs have been more like $50 and much shorter-lived. Higher lows, in other words.

Advertisement
Advertisement - Article continues below

There have now been four re-tests of the zone in 2018 alone. "The more times a level is tested, the less likely it is to hold", you will have heard me say many times on these pages. I can't help thinking that $1,360's resolve at gold's Bridge of Khazad-dm is weakening.

And once we're through that, I can't help thinking there should be fairly safe passage through to the mid- to high $1,400s albeit with a couple of wobbles along the way.

Here's another good omen for gold

The astute among you might point to the fact that gold's strength has been as much about US dollar weakness as anything. Against sterling for example, which has been strong, gold is flat, indeed it's down a few percent compared to where it was after the Brexit vote.

Advertisement - Article continues below

This is true, but then I see your sterling, and raise it bonds and stocks.

It's early days, so don't reach for the champagne just yet. But we are starting to see gold outperform both stocks and bonds. It's been a long time since we have been able to say that early 2016 aside. If you measure bonds by the iShares Barclays 20+ Treasury Bond exchange-traded fund, (NYSE: TLT), then gold has actually broken out to three-year highs.

Against stocks, the story is less convincing. But over the past couple of weeks, gold has outshone the major stock indices, especially the FTSE 100, which has been awful.

The chart below shows gold vs the S&P 500 (in other words, the gold price divided by the index level of the S&P 500 when the line is going up, gold is outperforming) and against the bond ETF, TLT (again, when the line is going up, gold is outperforming bonds).

180326-gold-v-sp500

These are small victories, but given what the goldbug has been through these last seven years, any victory is a victory.

Advertisement - Article continues below

Outperformance is what will attract the capital, so outperformance is what you want to see.

But given the current volatility of stockmarkets and there was another bout yesterday money is likely to flow to gold. My outlook for stocks is choppiness; that should benefit gold.

I've been saying it for a while the stars are slowly aligning for gold. If gold can catch a bid, then silver and the miners should all catch a bid too. At the moment, gold has been outperforming the miners and silver, or their performance has been roughly equal. In a proper bull market you will see silver and miners lead. Maybe it is they that must lead us across the aforementioned bridge.

I'm sure there are many MoneyWeek readers who have owned gold since the 00s, riding out both the bull and the bear market. I can't help thinking the next five years are going to be better than the last five.

Advertisement
Advertisement

Recommended

Don’t panic about Iran – but don’t sell your gold either
Gold

Don’t panic about Iran – but don’t sell your gold either

Markets have reacted calmly to the tension between the US and Iran. But don’t get too complacent. It’s still a good idea to hold on to some gold as in…
9 Jan 2020
Here’s how gold could rise above $7,000 an ounce
Commodities

Here’s how gold could rise above $7,000 an ounce

That the gold price could hit $7,000 an ounce is a logical and plausible possibility, says Charlie Morris. Here, he explains how it could get there.
30 Dec 2019
Gold is in a bull market – and it could have much further to go
Commodities

Gold is in a bull market – and it could have much further to go

Many investors forget that gold is still the best-performing asset of this century, says Charlie Morris. It could also have much further to go.
27 Dec 2019
All the gold in China: money and power goes east
Economy

All the gold in China: money and power goes east

China has far more gold than official figures suggest – as much as America, in fact. He who owns the gold makes the rules, says Dominic Frisby.
15 Nov 2019

Most Popular

BP has slashed its dividend – and markets love it
Income investing

BP has slashed its dividend – and markets love it

BP has bowed to the inevitable and cut its dividend in half – and its share price promptly rose. John Stepek explains what it means for shareholders …
4 Aug 2020
Listed companies are dying out, and that could have serious consequences
Stockmarkets

Listed companies are dying out, and that could have serious consequences

Private equity is taking over from public stockmarkets as the biggest provider of capital to companies. That’s bad for investors and bad for society a…
3 Aug 2020
Gold hits the big $2,000 level – are Aim miners about to play catch up?
Gold

Gold hits the big $2,000 level – are Aim miners about to play catch up?

With the price of gold shooting through $2,000 an ounce, the yellow metal looks unstoppable. Things are so bullish, even Aim-listed junior gold miners…
5 Aug 2020