Two More Bridges For Gold Prices To Cross Before The Big Leap

October 19, 2015

goldGold is starting to be taken more seriously by global investors and traders for the first time this year. Some talk of a ‘sea change’ in attitudes towards the precious metal this autumn.

The gold price crossed its 200-day moving average last week and this is regarded as a significant step by technical analysts, albeit the last three times this has happened prices have actually reversed to the downside over the following six months or longer. Hopefully this time will be different.

Gold Prices

That said it was also this technical signal that kicked off the last big leap in gold prices from the mid-2009 bottom to mid-2011 top, an unforgettable rally for gold investors from $860 to $1,923 an ounce. Never say never again. Chart patterns often do repeat.

But traders will be far more confident when the gold price has taken out two more significant hurdles: $1,200 and $1,227. The first is just a round number and gold tends to struggle with them: just look at how long $1,300 lasted back in January. Well it didn’t.

The second bridge to cross is the 90-day moving average for the gold price which has been a far more reliable indicator for gold price movements than the 200-day line. Indeed in January this year the gold price was tantalizingly close to the 90-day moving average line but fell short, with disastrous consequences. 

The significance of the 90-day moving average is that the last three times gold has broken this line in the past 16 years, it has marked a transition from a bear to bull market. Nothing is ever 100 per cent for sure in technical analysis, but it does not get much better than this. So expect some serious fireworks when gold crosses the $1,227 an ounce mark. 

Golden Catalyst?

What is going to make that happen? Now we have to examine how gold prices are likely to perform as the world faces up to its first recession since the global financial crisis in 2016. 

Of course the writing is already on the wall if you care to read it. Citi chief economist Willem Buiter says the slowdown in China will pull the world into recession next year; recent US economic data series have been mainly worse than expected; and HSBC, one of the world’s largest banks says yields on US treasuries are going to fall from two to 1.5 per cent next year, and that’s consistent with a recession.

If this is correct then it turns the Goldman Sachs argument for not owning gold on its head. The Wall Street titan correctly called a lower gold price earlier this year due to expectations of an increase in interest rates by the Fed because of a strengthening US economy. 

Gold Prices Going Up?

However, those expectations have never translated into reality. In fact if HSBC is right, then interest rates are heading down, not up. If Goldman was to apply the same logic that it did earlier in the year, then it would have to conclude that gold prices are now going in only in one direction: UP!

October is the traditional month for Wall Street Crashes and after the rally of the past few weeks against a background of bad economic data and weak Q3 outlook statements from major companies, a major reversal in the stock market could well be coming. Ironically, the same lower interest rate environment that boosted gold to $1,189 an ounce in the past week has also been good for stocks whose dividends look more attractive against lower rates. 

But this is a bit of a fool’s paradise. Would a turkey’s vote for Thanksgiving Day if it knew what was going to be on the table? If lower interest rates are also pointing to a global recession in 2016, then how can they really be good for USA Inc. or stocks? Every recession has been anticipated by a stock market fall…not a rally.

For gold a big fall in US stocks is not necessarily instant karma. The slump in the gold price in the 2008-9 stock market crash was a case of the good being sold with the bad to meet margin calls, and something similar could happen again. The dollar also tends to rally when stocks drop, which is not good for gold either.

New Bull Market

On the other hand, in 2008 gold was coming off a seven year bull market and not emerging from a four-year bull market as it is today. I wrote several articles at the beginning of August arguing that this was the bottom for this bear market, and so far that prediction has been correct with gold prices more than $100 off that bottom at the end of last week.

There is also a reasonable argument to suggest that gold prices and the US stock market are not directly correlated and tend to function independently of one another. It is certainly possible to point to market episodes in the past where gold went up and share prices headed in the opposite direction, and did so over many years.

Another reason to think this might be right this time around is that financial markets will begin to look beyond a stock market crash and there will then be fears that the bond market will be next. True higher interest rates would make bonds an attractive buy again, but you have to get there first via a bloodbath in the bond market, the world’s largest and most liquid financial market.

Bond Markets

Traditionally it is when bond markets blow up that gold and silver prices make their greatest gains as the shift from paper to monetary metals is completed before a re-set can occur to begin the move in the opposite direction to restart the stalled credit machine. Nobody really thinks that the bond markets can continue to pay such low interest rates forever, or for much longer, and that will be the moment to be long precious metals and not worthless paper.

Watch carefully as gold takes out the two price targets mentioned at the opening of this article but what’s coming is going to amaze us all, and that’s a very neat point to start writing for you on Gold-Eagle.com.

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Peter Cooper has been a senior business and financial journalist for 20 years. Since selling his dot-com news website before the global financial crisis he's been a gold and silver investor. Cooper studied politics, philosophy and economics at Trinity College, Oxford University. He was 'financial journalist of the year' in the UK some 25 years ago for his scoop on the privatization of Russian real estate, the largest privatization of public property in history. You can reach Peter at: dubaijournalist@gmail.com.

U.S. ranks third in world gold production with 240 tons per year