The move to new all-time nominal highs is unequivocally bullish. Gold is now in what technical analysts call ‘blue-sky territory’. There are no historic price levels that now stand in its way. So how far might gold rise and why?
Taking a step back, I see gold as being in a long-term bull market, both in absolute terms and in relation to equities. The last such episode was during the 1960s and 1970s, when gold shone and shares slumped. The same happened during the Great Depression.
There have been 11 periods since 1774 during which gold has beaten the stock market. On average, gold has outperformed equities by an annualised 7 per cent over seven years. Today’s bull market is already in its 12th year, but its previous boom in from 1965-1980 lasted longer and saw bigger gains. Once you adjust for inflation, gold is still far below the level it attained in 1980.
In order to equal its real-terms record, it would need to rise to well over $2,200 in today’s money. While there are no historic price levels to guide us along the way, my Fibonacci projections point to major objectives at $1,541, $2,000, and $2,856.
How will the end of the bull market in gold come about? One feature of commodity markets in general is that while they can take a long time to form bottoms, they form very sharp tops. This was certainly the case with gold in its biggest bull run of modern times, when it spiked briefly in 1980 and then entered a multi-year slump.
Despite the strength of gold’s up-move since 999, there have been a number of substantial sell-offs along the way. I expect this pattern to continue for the rest of this bull market, and believe the dips make obvious buying opportunities. The 34-week exponential moving average – the blue line on the chart – is a level that is well worth watching, since a number of corrections have ended at or around it.
Another indicator that you should keep an eye on is speculative interest among commodity traders in the US. The weekly data from the Commodity Futures Trading Commission compares the number of speculators with long positions with those who are shorting gold – displayed in the lower panel of the accompanying chart, above.
When the number of long positions heavily outnumbers the number of short positions, you know it might be better to wait for a pull-back before entering.
