Gold: The Only Thing Standing Still

I wanted to take a look at gold today.

I’m going to dust off my powers of divination — or as they call it in the City, technical analysis - and see if we can figure out where it is going next.

As things got frothy back in April, I argued that the market was probably due a breather. The summer is usually gold’s weakest season. Why this should be I don’t know, but it is.

You’ll often find it makes a low in May or June, then re-tests that low in July or August, then things pick up in the autumn or fall, as our more literal cousins call it.

In any case, I’m pleased to report that gold has basically range-traded, or consolidated, since the frothy days of April, between $3,500 and $3,100.

The $3,000 level has more than held, which makes me wonder if we shall ever see gold with a $2,000 handle ever again. Unless there is a 2008 or Covid-style panic, I rather doubt we will.

Meanwhile, the RSI (see the bottom panel below) has come off, meaning the heat has come out of the market, which is good.

Since the US confiscation of Russian assets in 2022, pretty much every pull back to 50-day moving average (red line) has been bought, and they continue to be bought. The average is now flattening out, as you would expect with this summer consolidation, rather as it did late last year. Some sideways consolidation is good. Ideally, you want to see the short-, medium- and long-term moving averages all flatten and converge. There often follows a big move higher.

The long-term moving averages (1 year and so on - not shown here) still have a bit of catching up to do (they are around $2,850 at the minute), which they will and fairly quickly as the gold price continues this sideways action.

We also have something of a triangle forming (see blue lines) - with lower highs and higher lows. Triangles are seen as continuation patterns. In other words, whatever was the direction going into the formation will be the direction coming out. Up, that is to say.

I rather think this triangle will complete just as the moving averages converge.

When you look at gold against other currencies, the same process can be seen: a summer consolidation after an excellent winter and spring.

If you are in any doubt as to whether you should own gold or not, let me answer that for you in the words of the former HSBC fund manager Charlie Morris, who now writes Atlas Pulse, one of the best newsletters out there - (you should subscribe it’s free). “Gold should be the cornerstone of an investment portfolio,” he says. “It is remarkable how few professional investors understand this”.

Charlie may have a point. Look how underweight gold western portfolios are. Below 2%. Nuts.

The Trump administration is going to run enormous deficits. It is not attempting to hide the fact. The same goes for the Starmer administration in the UK. The Labour backbenchers, who now seem to control policy, will not allow reduced spending. We saw that last week. Most EU nations have not got their spending under control. It means further declines in the purchasing power of the dollar, pound and euro are inevitable. Gold is your protection.

What’s more, as demonstrated by the enormous buying coming out of Asia from Shanghai Cooperation Nations, China especially, it is clear gold is becoming a highly important strategic asset again. It is this buying, plus some huge options trading in China, that is driving this bull market, and it began shortly after, as I say, the seizure of Russian US dollar assets.

Metals Daily’s Ross Norman, whose track record forecasting the gold price is second to none, tells me: “We are confident that there is significant unreported central bank gold buying which, coupled with some pretty heady options plays from within China, accounts primarily for a near doubling in the gold price over the last 18 months or so.

He goes on:

The days when central banks telegraphed their moves in advance in the interest of transparency are long gone (thank you Gordon) and they are far more nuanced and opportunistic in their approach.

With Asian central banks very much under-weight gold reserves, and energised by a growing debt crisis, further fuelled by the trend to reduce dollar holdings and you have a perfect set-up for a continuing gold bull run.

At the moment the East invests in gold while the West divests which actually sums up the last 30 years between those hemispheres.

This bull market is consolidating. It is not over. Whether it’s because of de-dollarisation or your nation’s deficit spending, there is demand for gold, which is going to send the price higher.

It may be an analogue asset in a digital world. But you will be glad you own it.

Until next time,

Dominic

If buying gold or silver to protect yourself in these ‘interesting’ times, the bullion dealer I use and recommend is the Pure Gold Company. Pricing is competitive, quality of service is high. They deliver to the UK, the US, Canada and Europe or you can store your gold with them. More here.

Some recent articles which may be of interest:

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.theflyingfrisby.com/subscribe