What’s next for gold?

What’s next for gold?

The past month or so has caused those who invest in gold bullion a small amount of concern. The gold price has dropped to below $1700, after some significant gains since January. Whilst the fundamentals for gold investment remain stronger than ever, Dominic Frisby has written a useful, and reassuring, analysis on the gold and silver price in the short term.

I’m not unduly worried about the gold price.

But when I saw it had dropped $40 yesterday from $1,700 an ounce to almost $1,660 in the space of just a few hours, I’ll admit a concerned eyebrow was raised.

So I suppose a bit of hand-holding is in order today – even if it’s only my own.

Gold may not see fresh highs for at least another year

Let me start by re-visiting my forecast of several months back. By my reckoning, we wouldn’t see new highs in gold for at least another year, ie not before autumn 2012, if not later.

I based this forecast on a simple, repeating pattern that gold makes when it gets ahead of itself. In the chart below, you can see gold’s action since 2001. It’s plotted on a logarithmic chart, as the pattern is clearer that way. (A logarithmic chart measures percentage gain on the y-axis as opposed to an arithmetic chart which measures price. So on a logarithmic chart, a move from 200 to 400 looks the same as 400 to 800 and so on).

Gold price since 2001

You can see what a lovely consistent ascent it’s been.

But even within this steady uptrend there are times when it’s got a little ahead of itself and then pulled back, as I’ve indicated in yellow on the chart. One example is in early 2003, another is in May 2006, another February 2008, and of course the same thing happened again in September 2011.

Each time it’s done so, it’s had a nasty fall, followed by a period of consolidation and digestion. And the more it’s got ahead of itself, the bigger the fall and the longer the subsequent consolidation phase. I’m thinking in particular about the 18 months or so that followed the highs of May 2006 and February 2008.

On both occasions it was well over a year before gold made new highs. I believe we’re in just such a period now. The high gold made last September at $1,920 was a typical example of gold going too far too fast. Now we have the consequent period of digestion.

So that’s how I’m interpreting the big picture.

Gold measured in sterling is far less smooth

Out of interest, I present to you now the same chart, but of gold measured in pounds. The graceful ascendency is gone. This chart is hiccuping its way higher in steady, annual burps.

Gold price in sterling

The inverse of this chart – which shows just how much the pound has fallen against gold – has the look of a geriatric stumbling blindly to his coffin.

Sterling vs price of gold

The short-term outlook for gold

Now let’s zoom in and take a look at the nearer term. Here is a one-year chart of gold.

Gold price in the last year

My famed 144-day moving average (blue line) has now become resistance, unfortunately. I see good support in the $1,550 zone, where I have drawn the light blue band. And I see resistance at $1,800 where I have drawn the red band.

These will be, I suspect, the two lines in the sand for the time being, probably until the autumn. Of course, these are just guesses – I know no more than you.

But again, staring at the chart and guessing, I suggest a retest of at least $1,600 looks to be on the cards before gold’s normal, upwardly-mobile business can resume. But such a re-test, should it occur, would give a nice symmetry to the chart and add to that decent-looking base at $1,550.

Could the miners finally start to outperform?

As for silver, I see a similar picture with strong support at $26, but resistance at $38. Silver does seem to be displaying some relative strength, which is positive.

Also on the positive side of things, I am seeing some buying coming in to the junior resource sector. This is probably because of broader stock market strength, but I’m hoping we’re in the early stages of one of those periods when the stocks outperform the metals. Not before time, that’s all I can say.

I’ve just come back from the PDAC in Toronto, which is the world’s biggest mining conference. I must have spoken to over a hundred different companies while I was there. I’ll be publishing my notes from the conference, as well as my pick of the PDAC in a new report, so watch this space.