Gold is back in the game – so what’s our next price target?

One-kilogram gold bars Photographer: Akio Kon/Bloomberg via Getty Images

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Gold. Phew! What a month.

It’s like somebody has been pulling back the elastic on the catapult for five years or more.

Then, on 31 May, they let go. Whoosh.

From around $1,270 an ounce on 31 May, to today’s price of $1,430. Obviously that pales in comparison to the likes of bitcoin, but by the standards of fuddy duddy old gold, it’s quite something.

Up, up and away.

Gold is finally breaking out

Go back a decade and I doubt you’d find a bigger goldbug than your author. I was so bullish about the stuff.

But the bear market of the past eight years has rather changed my outlook, turning me into a wizened cynic. The cries of “to da moon”, or that the collapse of fiat currency was imminent that came with every rally left me cold. The rallies did not last. The bear market ground on.

“Call me when it gets through $1,360,” I’ve kept saying. “Then we can re-think.”

And so this week they’ve called. Gold went through $1,360 like it wasn’t there.

Before we go any further, let me just illustrate why I see $1,360 as such a key number. Here’s a chart of gold since 2011, when it made its all time high of $1,920/oz.

You can see how since 2013 that $1,360 area has proved a huge barrier of resistance. Gold has tried and tried but for six years it’s been unable to get through.

Gold price since 2011

But that also means that for six years, gold has been forming a huge base. “The bigger the base, the higher in space,” you will have often heard me say. We have the foundations for a really good run here – six years of consolidation.

As I write this now, gold sits at $1,430 and is running away. Every day it seems to be shooting another couple of percent. The last time it acted like this was in early 2016. It’s really shifting.

Wall Street is underinvested – exchange-traded fund (ETF) holdings show that. Money is rushing to get back into this market. That’s what keeps pushing the price up.

We think of the gold price in US dollars, because that is the most commonly used measure. But in sterling it’s barely £50 off its all-time high of £1,180/oz; against the euro it is just €100 away from its high at €1,350/oz; against the Australian dollar it broke out to new highs just this week; same goes for the Canadian dollar.

So gold has been made to look weaker by the fact that the US dollar has been strong relative to most other currencies. Indeed, that is a question we must now ask ourselves if we are to to divine where gold goes next.

Is the US dollar going into a period of weakness? A bear market, even? It’s almost the most important question in finance.

The US dollar is heading for a bear market, but more on that later this week

I’m calling a bear market – and I’ll have more on this in Friday’s Currency Corner. My view is that we are at the beginning of a bear cycle for the US dollar.

But back to gold. Gosh, I must say, as MoneyWeek’s resident gold bug, it feels good to be writing positively about gold again. I’m interested to see what narratives form over the coming months to accompany this move. Much of what gold does will depend on the power of those narratives.

But in the short term, we are overbought by just about every technical measure you can think of. The speed of this move means it feels as much like short-covering as anything. Cripes, I opened my Telegraph app yesterday and there was an article on the front page about how to buy gold – that’s a bad sign if ever there was one.

All that suggests at least a pause, even if bull markets do register continuous overbought readings.

My next line of resistance for gold is $1,430 – right where we are now. This has proven both a point of resistance and support in the past and, for whatever reason, markets often seem to remember these price points.

The 2013 rebound rally, which, it must be said was anaemic, gave up the ghost at $1,430, and then go back a couple of years and gold spent several months in late 2010 and early 2011 trying to get through $1,430.

Gold price resistance charts

So, yes, there’s not an unreasonable chance given the overbought readings and the price point that this rally stalls here – at least for now.

But if the dollar, which itself is oversold on short-term measures, carries on falling, gold will carry on rallying. The next line of resistance I have is in the $1,520-$1,550 zone. This was a huge line of support for gold between 2011 and 2013. It marked the low for that period and re-tested those levels several times.

I don’t think it’s unreasonable to think that gold can get up there – once $1,430 is out of the way.

If $1,430 doesn’t give way, the beauty of that $1,360 area that was resistance for so long, is that it should now prove to be support.

In short, I’m delighted to see gold at five-year highs. It is back on the map.

Until next time,
Dominic Frisby