Recent price behaviour and the failure of gold to stay above 1.837 gives rise to concern. To recapture the bullish outlook, 1.877 has to be taken out, else it opens the door for a longer term corrective structure down towards 1.530.
1.877 (1.880) is now the structural pivot where the outlook changes from bearish to bullish and longer-term mathematical targets change from 1.530 down to 2.075 and 2.310 and maybe even 2.550 up. Volume patterns support the bullish outlook as do the fundamentals, but the recent failures are of concern. Because gold has failed to follow through on the last two upside breakouts, the door is still open for a continued correction, that started in August 2020, down towards 1.530, but the fundamental outlook is still strong.
Should the bullish outlook be allowed to get foothold, the sky will not be the limit, but price targets up towards 2,300-2.500 can be argued for; this will need fine tuning down (or should we say up) the road, when we get a bullish structure in place above the 1,877 USD/Oz pivot.
Gold’s fundamental picture looks positive
Even though the technical picture looks messy currently, the fundamental backdrop looks quite positive. Yields have already gone up quite a bit on expectations of CB tightening and QT. Inflation is here to stay in some way for the foreseeable future, and it can be expected that central banks and governments will seek to keep real yields negative for a long time going forward, enabling governments to slowly erase some of their debt, which in most developed economies has reached non-repayable levels.
Don´t forget that governments prefer to default slowly on their obligations (inflation), and the best way to do this is to keep interest rates too low and thereby irrigate inflation, which they will never admit to, but most probably are trying to do.
Finally, sentiment is also quite good at the moment, since all the major banks have bearish outlooks on gold, which some believe has to do with the Basel III changes this year – the banks are bearish because they hold uncovered short positions that they need to close. A little bit conspiratorial, but nonetheless a point not to be forgotten.
So bullish fundamentals, strong negative sentiment from the banks and a messy structural technical picture, lead me to be more bullish than bearish at current levels, but I am aware that this is not confirmed technically, and a lot of good work needs to be done before one should be too aggressive here.
Gold mining stocks: my approach
I am already long a series of gold mining stocks, and I will keep trimming and concentrating my position at the above mentioned levels, but stop selling above 1.877 USD/Oz and start accumulating on dips from there.
I like to play the smaller explorers for hits and then the medium sized developers and producers for their torque towards the gold price, but also because of their attractiveness in the M&A game that we will see a lot of in the coming years. Majors have fading reserves, which they will need to cover through M&A.
Henrik Mikkelsen is an investment strategist and investor with Iridis AG in Switzerland.