New Multi-year Gold Rally Has Emerged
The US dollar price of gold has been on a roller-coaster ride for the past six years.
But the past six weeks have been a turbocharged version of that.
Investors should expect more of the same for reasons explained below.
The six-year story is the more important one for investors and also the more frustrating.
Gold staged an historic bull market rally from 1999 to 2011, going from about US$250 per ounce to US$1,800 per ounce — a 620% gain.
Then, gold nose-dived into a bear market from 2011 to 2015, falling to US$1,050 per ounce in December 2015 — a 45% crash from the peak and a 51% retracement of the 1999-2011 bull market.
During that precipitous decline after 2011, gold hit a level of US$1,417 per ounce in August 2013.
It was the last time gold would see a US$1,400 per ounce handle until June 2019, when gold briefly hit US$1,440 per ounce on an intra-day basis.
At last, the six-year trading range was broken.
Better yet, gold hit US$1,400 on the way up, not on the way down.
The range-bound trading from 2013 to 2019 was long and tiring for long-term gold investors.
Gold had rallied to US$1,380 per ounce in May 2014, US$1,300 per ounce in January 2015 and US$1,363 per ounce in July 2016 (a post-Brexit bounce).
But for every rally, there was a trough.
Gold fell to US$1,087 per ounce in August 2015 and US$1,050 per ounce in December 2015.
The bigger picture was that gold was trading in a range.
The range was approximately US$1,365 per ounce at the top and US$1,050 per ounce at the bottom, with lots of ups and downs in between.
Yet, nothing seemed capable of breaking gold out of that range.
Geopolitics, rates, and supply and demand
The good news is that gold has now broken out to the upside.
The US$1,440 per ounce level is well within reach and the US$1,400 per ounce level seems like a solid floor, despite occasional dips into US$1,390 per ounce territory.
More importantly, a new multi-year bull market has now emerged.
Turning points from bear to bull markets (and vice versa) are not always recognised in real time because investors and analysts are too wedded to the old story to see that the new story has already started.
But looking back, it’s clear that the bear market ended in December 2015 at the US$1,050 per ounce level and a new bull market, now in its fourth year, is solidly intact.
The recent breakout to the US$1,440 per ounce level is a strong 37% gain for the new bull market.
This price breakout has far to run.
(The 1971-1980 bull market gained over 2,100% and the 1999-2011 bull market gained over 620%.)
The price action over the past six weeks has been even wilder than the price action over the past six years.
As late as 29 May 2019, gold was languishing at US$1,280 per ounce.
Then it took off like a rocket to US$1,420 per ounce by 25 June 2019 — an 11% gain in just four weeks.
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Gold just as quickly backed down to US$1,382 per ounce on 1 July, rallied back to US$1,418 per ounce on 3 July, and fell again to US$1,398 per ounce on 5 July.
These daily price swings of 1.5% are the new normal in gold.
Again, the good news is that the US$1,400 per ounce floor seems intact.
What’s driving the new gold bull market?
From both a long-term and short-term perspective, there are three principal drivers: Geopolitics, supply and demand, and Fed interest rate policy.
The US dollar price of gold is just the inverse of US dollar strength. A strong US dollar = a lower US dollar price of gold, and a weak US dollar = a higher US dollar price of gold. Fed rate policy determines if the dollar is strong or weak.
The first two factors have been driving the price of gold higher since 2015 and will continue to do so.
Geopolitical hotspots (Korea, Crimea, Iran, Venezuela, China and Syria) remain unresolved and most are getting worse.
Each flare-up drives a flight to safety that boosts gold along with US Treasury notes.
The supply/demand situation remains favourable, with Russia and China building up their reserves while global mining output has been flat for five years.
The third factor, Fed policy, is the hardest to forecast and the most powerful on a day-to-day basis.
The Fed has a policy rate-setting meeting on 31 July.
There is almost no chance the Fed will raise rates.
The issue is whether it will cut rates or stand pat.
Fed may cause next gold price rally
The case for cutting rates is strong.
US growth slowed in the second quarter to 1.3% (according to the most recent estimate) from an annualised 3.1% in the first quarter of 2019.
Inflation continues to miss the Fed’s target of 2.0% year-over-year and has been declining recently.
Trade war fears are adding to a global growth slowdown.
On the other hand, the June US employment report showed strong job creation, continued wage gains and increased labour force participation.
All of those indicators correspond to higher future inflation under Fed models.
The recent G20 summit meeting between US President Trump and Chinese President Xi led to a truce in the US-China trade war and the prospect of continued talks to end it.
In short, there’s plenty of data to support rate cuts or no cuts in July.
The Fed is biding its time.
Meanwhile, the market is highly uncertain.
A good headline on trade results in a stronger US dollar and weaker gold.
The next day, a bad headline on growth results in a weaker US dollar and stronger gold.
This dynamic explains the erratic up-and-down price movements of the past week.
The dynamic is likely to continue right up until the 31 July Fed meeting.
All the best,