Gold is now just $40 shy of reaching its 2011 record high of around $1,921 an ounce. If it gets there, who is to say it can’t go to $2,000 next?
The remarkable rally for gold and silver has continued today. Gold is now just $40 shy of reaching its 2011 record high of around $1,921 an ounce. If it gets there, who is to say it can’t go to $2,000 next? Obviously, no one knows if it will get there, but momentum is certainly bullish, and the fundamental backdrop is still supportive. That said, I cannot rule out short-term corrections here and there. It is even possible we could see a deeper retracement. Even so, I would only drop my long-term bullish view on gold in the event there is some bearish fundamental stimulus.
For those who have followed my analysis on gold, I made a bold call last year that the yellow meal might reach the $2K hurdle at some point in 2020 – see HERE for example. Obviously, I had no idea then that the pandemic would hit, or the stock market would do what it did. The fundamental reason behind my bullish view on gold was this: “Bond yields are likely to remain depressed as global central banks try to combat slowing economic growth and subdued inflationary pressures with extraordinary loose monetary policy.”
Well, that reason has become even more valid after the pandemic caused one of the most severe recessions the global economy has ever seen. Real government bond yields have been falling sharply and the US dollar has weakened noticeably. So, financial demand is certainly there.
And the specific reason I thought gold would be heading to $2000 was based on a combination of safe-haven flows due to a potential stock market correction and technical buying momentum. I said: “If U.S. stocks were to correct themselves in 2020, then this surely could lead to elevated levels of safe-haven demand for gold,” and that “as the U.S. equity market bubble finally bursts, safe-haven demand could nudge gold past its 2011 peak of $1920, before tagging the $2,000 psychological hurdle.”
Equities did correct themselves in March, before the bubble got inflated again by the massive stimulus central banks and governments have since announced. However, once the impact of stimulus fades, the stock markets may well deflate again. Thus, the so-called “smart money” could continue to go into safe havens gold and silver, further fuelling the rally.
All that said, it is worth remembering that this bullish environment for gold and silver could change – perhaps dramatically. Jewellery demand is likely to weaken further as gold prices rise, made worse by consumers’ disposable incomes having dropped due to the economic impact of the pandemic. With rising prices, gold miners will be ramping up production to sell as much as they can at higher prices. What’s more, the rally is potentially becoming self-perpetuating, and thus speculative. With everyone talking about gold amid rallying prices, retail money has been flooding in precious-metals funds. Usually this doesn’t end very well.
But gold may surpass that 2011 peak, and could hit my $2K target, before potentially correcting itself in a meaningful way:
Source: TradingView.com and ThinkMarkets
It is possible that a lot of speculators who have tried to short this rally will be trapped, placing their stop-loss orders above the all-time high, which is now not too far off. The cluster of those buy stop orders may act as a magnate and pull the market towards it, before spiking as the orders are tripped. After that potential spike, the rally may then potentially end. So, if you are a gold bear, it may be worth wating for the right moment to pounce and after some confirmation.
Right now, gold is making higher highs and higher lows, and a lot of dip buyers would be happy to keep buying every dip until this strategy fails to work. On the chart you can see some potential levels of support where weaknesses might be faded as the metal melts up towards its 2011 and record high.
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