From mom-and-pop investors, to the marquee names on Wall Street, everyone seems to think that it’s a matter of when, not if, gold will hit $2,000 an ounce.
And why not? Trillions of dollars of stimulus are flowing in from global central banks. At the same time, safe-haven bids haven’t let up from those worried about further health and economic despair from a new wave of COVID-19 infections.
Add near-zero US rates, low real yields, record inflows into gold-backed exchange-traded funds (ETFs), and increased asset allocation to precious metals as a whole, and the stars are aligned for the world’s favorite shiny metal.
Voice of Reason
But as the voice of reason implores us to “hold your horses!”—it always does in a rampant bull market—it’s worth re-examining whether a snapback is likely in gold—either on its way to revisiting the record highs of 2011, or beyond, towards $2,000.
COMEX gold futures reached a session high of $1,865.75, early on Wednesday, about $45, or 3%, short of the 2011 record high of $1,911.60.
Spot gold, the price of metal for immediate delivery, rallied to $1,865.87. It hit an all-time peak of $1,920.85 in September 2011.
Indeed, the derivatives market shows that investors are betting big on gold reaching $2,000 by late 2020. Data from CME Group, which operates COMEX gold futures and options, shows there is more open interest in calls—which confer the owner the right, but not the obligation, to buy gold at a set price by a set date—at a strike price of $2,000 than for any other December 2020 options contract.
With nearly 40,000 lots in open interest, December $2,000 calls are, by far, the largest strike for options maturing in the final month of the year. This accounts for over 15% of total open interest in December 2020 calls and easily beats the next largest strike—December $2,500 calls— with "just" 18,000 lots in open interest.
“No Obstacles” In Sight, But Rally May Take Breather
Slobodan Drvenica, the global head of analysis at Windsor Brokers in Amman, Jordan, said on the face of it, gold bulls had “no obstacles en-route to (the) $1,920 target.”
Yet, he cautions that “overbought studies on daily and weekly charts suggest that (the) rally may take a breather and position for its final push towards (the) $1,920” target.
Drvenica said a dip below the 20-day moving average at $1,792 for gold would sideline bulls for a “deeper pullback”, though he doubted that such a huge decline was possible ahead of the first test of $1,900.
Gold May Continue Rising, But Not In A Straight Line
Sunil Kumar Dixit, an independent analyst on precious metals, has a similar view:
“If gold sustains its momentum, buying can intensify taking it further to a record high of $1,920 without much resistance."
But the gold rally may not continue in a straight line, he said.
“Profit-booking cannot be ruled out, and this may push gold to retest support areas at $1,830-$1,815-$1,805."
“If $1,800 fails to hold, look for $1,791 below which bears can trigger a sell off to $,1770-1750 areas which may change the trend in the short to mid term.”
Some Investors May Feel “Hesitant”
Adam English of the Outsider Club in Spokane, Washington, said gold’s rally of more than 20% so far this year could leave investors feeling “a bit hesitant” that $2,000 was still within reach this year.
He recently wrote:
“Some of the biggest names in the market are lining up behind a surge that will leave the all-time high far behind."
“From the smallest retail investors, to the largest financial institutions, virtually everyone is now betting on much higher gold prices. Some surprising new big names just jumped on board.”
Nearly $40 billion flowed into gold-backed ETFs, which are typically favoured by retail investors, in the first half of the year, the Wall Street Journal reported earlier this month. It noted that the volume in those ETFs topped the previous annual record and highlighted robust investor demand for precious metals during the coronavirus pandemic.
Big Banks Set On $2,000 And Above
On Wall Street, Citigroup is the latest of investment banks which see gold breaching $2,000.
A Reuters poll on Tuesday showed analysts expect gold to continue its blockbuster rally throughout this year.
Bank of America strategist Paul Ciana said he sees the potential for gold prices to hit highs of between $2,114 and $2,296.
Three other large investment banks—Morgan Stanley, JPMorgan, and Goldman Sachs—have been on board the $2,000 gold train for a while.
JPMorgan analysts John Normand and Federico Manicardi said those who saw long-term liabilities in major currencies “should simply remain long the world’s legacy reserve currency—gold.”
Jeffrey Halley, a strategist for brokerage OANDA, shared this enthusiasm:
“Momentum remains secure with gold, likely pent up after narrow range-trading for much of July."
“Gold would need to record a daily close below $1,819 an ounce to call into doubt the bullish thesis.”
Disclaimer: Barani Krishnan does not own or hold positions in the securities he writes about.