Gold: Higher Highs and Lower Lows
Gold could be in a long-term trend right now that spells dramatically higher prices in the years ahead.
To understand why, let’s first look at the long decline in gold prices from 2011 to 2015.
The best explanation I’ve heard came from legendary commodities investor Jim Rogers. He personally believes that gold will end up in the $10,000 per ounce range, which I have also predicted.
But Rogers makes the point that no commodity ever goes from a secular bottom to top without a 50% retracement along the way.
Gold bottomed at $255 per ounce in August 1999. From there, it turned decisively higher and rose 650% until it peaked near $1,900 in September 2011.
So gold rose $1,643 per ounce from August 1999 to September 2011.
A 50% retracement of that rally would take $821 per ounce off the price, putting gold at $1,077 when the retracement finished. That’s almost exactly where gold ended up on Nov. 27, 2015 ($1,058 per ounce).
This means the 50% retracement is behind us and gold is set for new all-time highs in the years ahead.
Why should investors believe gold won’t just get slammed again?
The answer is that there’s an important distinction between the 2011–15 price action and what’s going on now.
The four-year decline exhibited a pattern called “lower highs and lower lows.” While gold rallied and fell back, each peak was lower than the one before and each valley was lower than the one before also.
Since December 2016, it appears that this bear market pattern has reversed. We now see “higher highs and higher lows” as part of an overall uptrend.
The Feb. 24, 2017, high of $1,256 per ounce was higher than the prior Jan. 23, 2017, high of $1,217 per ounce.
The May 10 low of $1,218 per ounce was higher than the prior March 14 low of $1,198 per ounce.
The Sept. 7 high of $1,353 was higher than the June 6 high of $1,296. And the Oct. 5 low of $1,271 was higher than the July 7 low of $1,212.
Of course, this new trend is less than a year old and is not deterministic. Still, it is an encouraging sign when considered alongside other bullish factors for gold.
Where does the gold market go from here?
We’re seeing a persistent excess of demand over new supply. China and Russia alone are buying more than 100% of annual output each year.
Private holders are keeping their gold as well. On a recent visit to Switzerland, I was informed that secure logistics operators could not build new vaults fast enough and were taking over nuclear-bomb-proof mountain bunkers from the Swiss Army to handle the demand for private storage.
With gold sellers disappearing and large demand continuing, the price will have to go up to clear markets.
Geopolitics is another powerful factor. The crisis in North Korea is not getting any better; it’s actually getting worse. Syria, Iran and the South China Sea are additional flashpoints. The headlines may fade in any given week, but geopolitical shocks will return when least expected and send gold soaring in a flight to safety.
Finally, the Fed will not raise rates in December, contrary to market expectations.
Eventually, the markets will figure this out. Right now, markets are giving about an 86% chance of a rate hike in December based on CME Fed funds futures. That rate will drop significantly by Dec.13 when the FOMC meets again with a press conference.
As market probabilities catch up with reality, the dollar will sink and gold will rally.
In short, all signs point to higher gold prices in the months ahead. I look for a powerful surge toward $1,400 by the end of this year based on Fed ease, geopolitical tensions and a weaker dollar.
The gold rally that began on Dec. 15, 2016, looks like one that will finally break the bear pattern of lower highs and lower lows and turn it into the bullish pattern of higher highs and higher lows.