Gold is at a Golden Crossroads

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The price of gold is at a crossroads right now. Will it go higher or lower? The precious metal is keeping its cards close to the chest, so let us look at the fundamentals and the technicals of the gold price.

It has been two months again since we gave you an update on the gold price and, in that time, a lot has happened. Not only did gold jump up from under 1,200 USD to almost 1,400 USD, but we also noticed different changes in the gold complex as some 2013 trends had a turning point in the first quarter of this year. But let us start with a trend that is still standing: the enduring Chinese hunger for all the available physical gold in the market. Since April of 2013, demand for gold in China has truly exploded and that has not changed in 2014. In the first quarter of 2014, the demand for physical gold (through Hong Kong and the Shanghai Exchange) will probably amount to more than 500 tons; an increase of 30% in comparison to the same quarter of last year. It is probable that the demand for gold in China will decrease as the gold price increases, but these figures are remarkable for the gold market regardless.

On the other side of the spectrum, there are gold trends that are changing. As mentioned before, investors dumped their publicly listed gold funds en masse in 2013 (ETFs, ETPs…), with an exodus from their respective gold reserves as a consequence. That, however, all came to an end in 2014. Even more, the reserves of GLD – the biggest gold ETF in the world – had an inflow of 780 to 820 tons of gold; an increase of around 5 percent. Things are also changing on the futures markets. The inventory of the COMEX – the American gold futures exchange – recovered a bit in 2014, albeit modestly as you can see on the chart below.

COMEX Warehouse inventory registered

The COMEX reserves hit a low on the 23rd of January 2014, when the inventory dropped back to just 370,000 ounces of gold. Meanwhile, the reserves have grown again to 640,000 ounces, although that is still a very long way from the April 2013 high of around 3 million ounces. If the Chinese are responsible for a large part of this drainage of COMEX gold, we suspect that the futures market’s reserves will remain unimpressive for a while longer. It would take a much higher gold price to inspire more influx of precious metal into the market, as the Chinese will not sell unless it is for a good reason or a higher price; that much is certain.

But as commodities markets often work, high prices are the best medicine for high prices and low prices are the best solution for low prices. What analysts actually mean by that is that a higher price elicits more selling activity, which in turn increases the supply and puts downward pressure on the price in the long run. On the other hand, lower prices cause for less gold to enter the market, which creates scarcity and, in turn, drives prices up. In the gold market, we have reached that boiling point. The market appeared to be literally and figuratively sold out in 2013, which is why the smallest rise in demand causes a jump in price. That is actually what we have actually experienced in 2014 as the gold price jumped up by almost 200 USD.

Gold at a golden crossroads

Although 60 USD has already been cut from the recent jump, the trend has not changed as you can see on the chart above. Moreover, the chart is about to make a ‘Golden Cross’, which involves a crossover to the upside of the short-term moving average (50-day) and the long-term moving average (200-day). In technical analysis books, this is signal is considered as one of the most powerful and bullish signals. Although it is still too early to tell, the situation and the above chart is shaping up to look a lot like the Golden Cross from 2009. In that year, negative sentiment among investors and scarcity on the physical market set the tone as well.

Still, it is important to keep our eyes on the ball here. If history is any indication, the gold price rose by 1,000 USD (+111%) in 2.5 years’ time after the 2009 ‘Golden Cross’ on the gold chart. A comparable increase in gold today would catapult us to 2,800 USD by the summer of 2015. We are not that far yet, however. At the moment, gold is consolidating its break-out and a further decrease to 1,275 USD is definitely possible, implying a 50% correction. The upward trend, however, will be confirmed over the coming weeks if the turnaround is validated. We are expecting the gold price to consolidate further over the second quarter after which the price can resume its ascent in H2 of 2014. The possibility is real that the previous record might be tested at that stage already, although it is a bit too early to tell. The 1,550 USD resistance level would have to be taken out with confidence to do that regardless, after which the road is open to 1,600 USD and beyond.

Gold is picking up the pieces from a very tough two years and investors have become side-tracked because of the velocity of last year’s price drop. Today, however, gold is surprising friend and foe and once again in the right direction. The Golden Cross, which is forming on the chart, should underline the change in trend. We foresee volatile times for gold, but we expect that the secular bull market has resumed after a cyclical correction and remain proponents of expanding portfolio positions in gold and gold mining stocks.

 

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