Cash gold has, through the year 2023, spent its time between $1.805 in February and March and $2.067 on 4 May. In the larger picture this looks like a mere sideways movement, so the question now arises, are we seeing the third larger top above 2.000 since 2020 and will prices retract, or is the price of gold merely taking a breather before it can carry on the journey many of us expected?
As can be seen from the daily chart below, there is a lot of overhang above us between $2.025 and $2.075 (the blue and red horizontal lines) from highs and closings on the daily and weekly. The recent up-move since March from $1.805 has so far been well defined in a rising channel, but it has been broken and challenged in recent days.
The ability to recover back into the channel is a positive, but not a must; gold needs to close above the 100 days EMA as well as keep closing above the low of May 30th at $1.932.
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Furthermore, the current weakness should not be considered eliminated before the price closes back above 1.985 because of the rejection back into the channel yesterday. For our short-term technical guidance, the level of $1.932 needs to stay intact on close, else deeper corrections or worse interpretations come into play.
Source: TradingView Daily Cash Gold with 100 Days EMA, and MACD and Stochastic RSI Oscillators
The fundamental side of gold could hold a positive setup and rotation trigger (as it always needs) through the lack of growth, but many investors are already asking themselves, why gold isn´t above 2.000 yet, since fundamentals like rising inflation and other unsafe outlooks in the future have been prevalent the last couple of years?
Holding gold down currently is the risk-on attitude in stock markets, which might well change very soon. We have also had rising US yields, bringing real yields into positive territory. This is holding the US dollar up and also having a depressive effect on the monetary metals. But remember, 2023 is also the year of the trillions – trillions in monthly trade imbalances and in yearly debt payments for the US! A theme of its own, but it spills very much into gold.
Other factors like the crisis in Ukraine seem to have fallen into the background, probably because we have become used to it, but also because the prospects for a future conflict between the US and China have gathered steam again.
What is gold and why do people invest in it?
Gold is a storage of value and used in jewellery, ‘the fear and love trade’, but mainly the currency for central banks, and central banks went on a record buying spree in 2022, double that of longer-term average buying; but since US Treasury yields have risen above 3%, there is now an alternative.
Zooming out onto a 10 year chart and the major drivers of gold, we need to look at the global asset allocation picture, and here the stock markets have been on quite the journey over the last 10 years, but also recently, with huge sector rotation dynamics and the duration trade shining again over the last months through the arrival of AI and falling 10 year yields.
“The Year of Resilience” has played well and nicely and has brought the US S&P 500 index into the 4300 zone which is our longer-term corrective up-level (4307-15). But maybe we need to change our rose-tinted glasses to stronger sunglasses? More on that next week.
Gold has suffered because of this asset rotation, but that does not mean the break up through 2075 will not happen. As long as the 1932 level holds on close, the shorter term bull picture is intact. Should it break down, then deep levels like 1805 and 1600 become relevant, but the overall long term bullish structure is still intact, it’s just that breakdowns will delay rising prices by years.
Source: TradingView weekly S&P 500 with 260 weeks MA
So where does this leave us on the investment side?
We want to stick with the bull case on gold, but keep our stops tight, around the 1930 area, on close or even on open, for a partial exit. If you want to operate gold stocks, then you’re either a gold bug and enter this trade via gold mining stocks, or an allocator and you would therefore enter through Exchange Traded Funds (ETFs) or the largest developers or producers.
The debate about junior gold explorers and when they will finally shine might be a story for another article. Unless gold breaks well above the 2100 level and the outlook for 2500 and above gets headlines, I do not believe that the non-cash flowing part of the junior mining space will see a significant rerating, with sustainable and longer periods of inflows.
There will always be some miners that hit the big finds, but overall, the juniors will be struggling while the gold price is below 2300 I believe, so seek to diversify your portfolio here in size and status. Remember only producers will harvest income, no matter if gold is at 1800 or 3000.
One specific theme I want to elaborate upon is the M&A aspect: the mining industry is facing lower grades and reserves, which is why M&A will become a much bigger issue in this sector going forward. That argument alone is a bullish one for mining stocks in general, but when you choose your single name miners, try to think more about what their exit strategy is and who will buy them. Is a buyout relevant at all? It requires size!
My own view here is that it will be mid-sized producers and the large developers that can be taken out, so that the buyer receives the ounces on their balance sheets tomorrow and visible cashflow in a shorter time.
Stay safe and resilient.
Henrik Mikkelsen is a Strategist, Investment Advisor and Business Developer with Iridis AG, an investment management and corporate advisory firm in Zug, Switzerland. Henrik has more than 30 years of experience from investment banking and commodity trading, running strategies for clients and himself, as well as writing about markets and giving lectures on technical analysis and risk management.
