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Gold Could Be Poised For A Rally

By Andy HechtCommoditiesNov 05, 2021 05:11AM ET
www.investing.com/analysis/gold-could-be-poised-for-a-rally-200607346
Gold Could Be Poised For A Rally
By Andy Hecht   |  Nov 05, 2021 05:11AM ET
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This article was written exclusively for Investing.com.

  • Hugging the $1800 level
  • The reasons that gold will shine
  • Barrons had a great analogy about inflation
  • Every dip has been a buying opportunity this century
  • Levels to watch in the gold futures arena

Gold was the first commodity to reach a new all-time high in the aftermath of the 2020 global pandemic. In August 2020, the yellow metal rose above the $2000 per ounce level for the first time and traded to a peak at $2063 on the nearby COMEX futures contract.

Meanwhile, gold had been moving higher before COVID-19 gripped the world. In June 2019, the precious metal broke out to the upside when the price rose above the July 2016 $1377.50 high. Gold rose to new record prices in euros, pounds, yen, and most other currencies in 2019 and 2020 before achieving the feat in US dollar terms.

Since reaching its all-time peak, gold has made lower highs as it passed the bullish torch to other commodity asset class members. In 2021, lumber, copper, palladium, coal, and other raw materials reached record levels. Other commodities, including energy, metals, grains, and other agricultural products, reached multi-year highs.

The rise in commodity prices has been nothing short of a bullish relay race, with one commodity handing the baton to the next.

Gold has been sitting in the background during the rallies in other commodities, consolidating and digesting its 2019 and 2020 gains. It may only be a matter of time before the bullish baton passes back to the precious yellow metal that is sitting near its consolidation pivot point at the $1800 per ounce level.

Hugging the $1800 level

Since mid-June 2021, December COMEX gold futures have settled into a trading range with $1800 as the pivot point. The level has been a price magnet during corrections and rallies. Meanwhile, some technical indicators had shifted since mid-June when gold began its mostly sideways trading range.

Gold Daily
Gold Daily

Source: CQG

The daily chart highlights some of the changes since June 17, when December gold futures moved below the $1800 level. Open interest, the total number of open long and short positions in the COMEX gold futures contracts, moved from 476,313 to 507,616 on Nov. 2, a 6.6% increase. The metric’s rise could be a sign of value buying in the gold market.

Price momentum and relative strength indicators were falling towards oversold conditions on June 17. On Nov. 2, they were sitting below neutral readings. Daily historical volatility fell from 18.51% to 10.62%, pointing to sleepy price action in the gold future arena.

The reasons that gold will shine

The gold market is sleeping as of nearly November 2021. Gold was the first commodity to reach an all-time high when the price rose to $2063 in August 2020. Since then, the yellow metal handed the bullish torch to other commodities that have reached multi-year highs for record prices. The secular bull market in commodities continued this week as cotton and wheat prices made new highs. Cryptocurrencies are sitting near record territory.

The following factors favor higher gold prices over the coming months and years:

  • The FOMC met this week and announced it would begin tapering its quantitative easing program. Tapering is not tightening as the Fed will continue to purchase debt securities through mid-2022. Moreover, short-term interest rates are not likely to rise until late 2022, at the earliest. Accommodative monetary policy is bullish for gold and other commodities.
  • Chairman Powell’s term ends in early 2022. There has been no signal from the White House if President Biden will reappoint him to a second term or replace him with an economist that reflects more "progressive” sensitivities in regulation, climate change, and social equity. Chairman Powell has been dovish. Any replacement would likely be a dove that soars at an even higher altitude.
  • The US Congress continues to debate the level of spending for the budget and infrastructure rebuilding package. While the political horse-trading continues, the bottom line is that spending will be in the trillions, which is stimulative.
  • CPI data in the US and worldwide continue to point to rising inflationary pressures. Former Clinton and Obama administration Larry Summers warned of 1970s-style inflation. Square (NYSE:SQ) and Twitter’s (NYSE:TWTR) founder and CEO Jack Dorsey kicked it up a notch when he recently forecasted hyperinflation in the US and the world.

Inflation eats away at fiat currency’s purchasing power. Even though the dollar index has been trading with a bullish bias, the rise in commodity and cryptocurrency prices is proof that all fiat currencies, including the US dollar, are losing value. Governments can issue more fiat legal tender to their heart’s content, but the only way to increase the gold supply is to extract more from the earth’s crust. Meanwhile, countries hold gold as an integral part of their foreign currency reserves, validating the precious metal’s role in the worldwide financial system. Moreover, governments have been net gold buyers over the past years, which continues in 2021.

Barrons had a great analogy about inflation

Gold is an inflation barometer. In the late 1970s and early 1980s, the metal’s price rose to a record high of $875 per ounce on the nearby COMEX futures contract.

Inflation Adjusted Gold Price
Inflation Adjusted Gold Price

Source: St. Louis Federal Reserve

The chart shows that the inflation-adjusted price of gold at the 1980 high was over $9,000 per ounce.

In a recent article in Barrons, the author compared inflation to the dinosaurs that roamed the earth millions of years ago.

It’s looking like inflation is transitory…in much the same way that dinosaurs were transitory—i.e., stomping around for ages, terrifying all manners of beast, and generally dominating proceedings before disappearing.”

The Fed and US Treasury continue to use the term “transitory,” but they fail to put a time horizon on the term.

Every dip has been a buying opportunity this century

Bull markets tend to experience ugly corrections and consolidation periods before making higher highs. Nearby gold futures ran out of upside steam at $2063 in August 2020 and fell to a low of $1673.30 in March 2021. At the $1790 level on Nov. 3, gold was below the midpoint of the trading range as it trades on either side of $1800 per ounce.

Meanwhile, the longer-term range began in July 2016 when gold reached a high of $1377.50. Gold broke above that high in June 2019, turning the $1377.50 level into long-term technical support. With resistance at $2063, the longer-term midpoint now stands at $1720.25 per ounce. The bottom line is that gold is sitting in limbo, below its short-term midpoint and above the longer-term average price.

A look back at the turn of this century tells us that gold’s trend remains higher.

Gold Monthly
Gold Monthly

Source: CQG

The chart highlights the pattern of higher lows and higher highs over the past twenty-two years that began in 1999 when gold futures reached rock bottom at $252.50 per ounce. While gold is $288 below its August 2020 high at the $1775 level, it is still $1522.50 above the 1999 low.

For more than two decades each significant dip or correction in the gold price has presented a compelling buying opportunity. The chart shows the trend remains long and robust with technical support at the July 2016 $1377.50 high.

Levels to watch in the gold futures arena

Gold has moved into a short-term wedge pattern of lower highs and higher lows, often leading to a break to the up or downside.

Gold Daily
Gold Daily

Source: CQG

The daily chart of December futures shows that technical support sits at the Sept. 29 $1721.10 low and the Aug. 9 $1677.90 flash crash bottom. On the upside, resistance is at the Oct. 22, $1815.50 high, the Sept. 3 $1836.90 peak, the $1839 high from July 15, and the $1922 June 1 top. Gold needs to mount a sustained move over the $1800 level to break the pattern of lower highs. A move above the $1840 level would erase the bearish price pattern.

Consolidation in the gold market has been frustrating for the most committed bulls as they watch other commodity and cryptocurrency prices soar. However, the sideways trading pattern is a healthy sign for the gold market as it digests the move to a nominal record peak in August 2020. Inflationary pressures suggest that gold will eventually take back the bullish baton in the asset class as the relay race to higher prices looks set to continue over the coming months and years.

Gold Could Be Poised For A Rally
 

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Gold Could Be Poised For A Rally

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Comments (20)
SunilKumar Dixit
SunilKumarDixit Nov 08, 2021 6:13AM ET
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Awesome read and superb analysis. Loved the inflation adjusted chart. The last para is irresistible. Compliments Andy Hecht.
simone scelsa
simone scelsa Nov 08, 2021 2:41AM ET
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Let's not forget that the infamous Basel III regulations will now take effect in 2023. This means that financial istitutions have to build their physical gold positions in 2022.
Rob McCance
Rob McCance Nov 07, 2021 10:29AM ET
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Not buying any of this. The best play for GC is still selling 10 delta strangles. For that, it's awesome.
Cooltrader Dxb
Cooltrader Dxb Nov 06, 2021 2:54PM ET
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Amidst good nfp and all the good datas for USD , why Gold is taking a ride ? Can anyone advide please ?
SunilKumar Dixit
SunilKumarDixit Nov 06, 2021 2:54PM ET
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Cooltrader. A Trillion dollar infrastructure bill passed , is the fuel behind the rally.
Shane Zhang
Shane Zhang Nov 05, 2021 2:01PM ET
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USDJPY failed to decline on Gold rally from 2018-2021.  Maybe Gold is in a dangerous spot, by look at where USDJPY right no
safwan nazaruddin
safwan nazaruddin Nov 05, 2021 11:12AM ET
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terrific...
Charles Sturrock
Charles Sturrock Nov 05, 2021 8:19AM ET
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The powers that be (Fed) that run this fake ponzi scheme of totally manipulated markets of all sorts, will not let gold advance in any substantial amount. If they did, it would draw money out of their system, and in essence the money invested in gold would become "dead money" to them. A gold rally is not coming. You heard it here first.
Awedam Joseph
Awedam Joseph Nov 05, 2021 8:19AM ET
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as a result gold price will drop massive and put the bulls to Critical state...
Sinenhlanhla Zwane
Sinenhlanhla Zwane Nov 05, 2021 8:11AM ET
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Which direction for Nfp today, let discuss, on my side i believe it will fall
Khabbab Abdallah
Khabbab Abdallah Nov 05, 2021 8:11AM ET
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Seems your belive was not on place Gold shine up By the way it is bad for because i share the same belive and i short on hold and get screwed 😞😭
Rosh Jardine
RoshJardine Nov 05, 2021 8:03AM ET
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Gold has to go down if the target is to push inflation down or else enjoy the free bull ride
John Ike
John Ike Nov 05, 2021 7:48AM ET
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hwo
Tom Martin
Tom Martin Nov 05, 2021 7:47AM ET
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probably a run to 3000 then take a break
Fatchur Rachman
Fatchur Rachman Nov 05, 2021 7:47AM ET
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What I get from this amazing article is, Sell Gold! Buy only if Gold break level 1840$
Sol Wein
Sol Wein Nov 05, 2021 7:46AM ET
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Great analysis
Peter Cooper
Peter Cooper Nov 05, 2021 7:44AM ET
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Bank of England's Governor saw inflation continuing to the middle of the decade and perhaps longer. If that is not good for gold then I don't know what is. Plus if you are a chartist the bullish pennant flag is as plain as the nose on your face.
Mehdi Captain Music
Mehdi Captain Music Nov 05, 2021 7:40AM ET
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Mention that this analysis is for long term. And becarefull of US situation, another wave of pandemic is able to crash all assets. Last thing, remove trading sentiments and add trading politics
IMRAN KHAN
IMRAN KHAN Nov 05, 2021 7:39AM ET
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hiii
Ebrin Eb
Ebrin Eb Nov 05, 2021 7:38AM ET
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Which direction for nfp that gold will go today I wonder
abel abel
abel abel Nov 05, 2021 7:38AM ET
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Gold will fall
Dániel Kriszt
Dániel Kriszt Nov 05, 2021 7:38AM ET
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watch today's analysis on yutube, write in: under the bridge gold and silver.
ogun olufemi
ogun olufemi Nov 05, 2021 6:50AM ET
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Good one. Bravo.
Jacob Steinschlag
Jacob Steinschlag Nov 05, 2021 6:23AM ET
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Good rational read Andy, thanks for that.
Jason Patcher
Jason Patcher Nov 05, 2021 6:07AM ET
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yay, your then first tomato to ketchup
IMRAN KHAN
IMRAN KHAN Nov 05, 2021 6:07AM ET
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yes
 
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