By Neland Nobel
We suggested that gold had put in a major low in early March, and put in a double bottom, a variant of the classic head and shoulders bottom.
The importance of $1800 was noted in the last blog and we suggested, that if that level were broken, gold would move to the next level of overhead resistance around the $1850 mark.
It was also observed that mining shares, which tend to lead bullion by four to six weeks, had already broken their respective overhead resistance and the important 200 day moving average. All of this is positive for the gold market and it remains highly likely the 9 month bear phase since the all-time high has ended and that gold will move to new areas of overhead resistance in the weeks and months ahead.
Now, gold has broken above $1850 and it is worthwhile taking another look at gold and what it may do in the intermediate term. This move above $1850 completes not just another bottoming formation, it also breaks the important 200 day moving average.
Gold broke the blue neckline at $1800, and has proceeded to the red neckline. If that is being broken, then gold has the potential based on the “rule of necklines”, and should proceed above the red neckline, roughly the extent the distance it is above the bottom.
So, do some simple math. From $1673 to $1850 is around $177 dollars. Thus, potential is to rise to area around the green line, around the $2000 mark.
There is resistance just below that level, and it might take some time for gold to work through this area. You can see the old highs in the $1960 area in the short term chart, and remember a major peak around $1930 was reached back in 2011.
Sort of like Russian nesting dolls, we seem to have one formation nestled in another. While this break out should support gold getting near to its last all time near $2100, the final formation is a real doozy.
As noted, we have one formation inside of another. This last one creates a neckline (pink) of a giant saucer bottom with a “handle” (green). The formation is very large and goes back ten years. A break of the area of $2000, could support an advance 88% above the pink line, roughly the distance from the pink neckline to the low in late 2016.
While this might seem like a fantastic suggestion, to move 88% above the pink neckline would be an objective for the gold price of $3760 dollars!
That number seems excessive, does it not? But gold moved in previous bull markets, from $35 to $200. From $200 it dropped to $100 and then on to $850. And recently, gold went from $250 low in 2000 to $1930 by 2011. Each move off the low of the cycle, went up by a factor of about 8. From the low of $1045 in late 2016, it could print actually quite a bit higher than our suggestion.
Is such a move possible?
We would suggest not only possible, but likely. First, charts work by their own rules, not opinion. That is what they say. If you don’t believe in charting, that is fine. Choose your own method of estimating but why should we believe that? What is the rigor and history behind your method?
Secondly, the government has lost all restraint. The final fetters to the gold standard were broken almost 50 years ago, in August 1971. Since then, the Congress is no longer worried about deficits and has embraced Modern Monetary Theory. Congress does not even have a budget, but floats one year to the next on continuing resolutions. Congress and the President don’t even feel the necessity of paying political lip service to deficits any longer.
No one cares, until they do.
The Federal Reserve has engaged in massive mission creep into areas of race relations and the environment. It has blown a series of financial bubbles in response to previous financial bubbles. It does not see a problem in the world they can’t solve with money printed from nothing.
Well, you might say, Congress will reign in the FED?
Why would they do that? The FED is in fact facilitating the spending binge of Congress, which along with President Biden, has seized the opportunity of the virus crisis to launch major new spending programs of all sorts.
Like two drunks holding up each other, the FED needs the Congress to expand its turf, and the Congress needs the FED to finance their deficits. The three institutions, the President, the Congress, and the FED, all are supporting each other. The independence of the FED seems to be something in name only.
We don’t see a FED chair like Paul Volker or a President like Reagan on the horizon. And sadly, the policy prescription of higher rates, rising against today’s gigantic debt bubble, has its own set of very serious problems. There is simply no painless way out of this crisis of excessive debt, deficits, and government intrusion.
There is a way out, of course. But it will require terrific pain to form a new consensus to change the way things have been going for the past 50 years. The pain will be necessary for the eventual reform.
Republicans were doing much the same when they were in power, and thus, we unfortunately don’t see any political constraint on greater deficits and monetary creation anytime soon.
At some point, the bond market, the currency market, and the gold market will likely call the bluff of the US government and its spending excess. But it will likely require extremes before that happens, and a terrible monetary and financial crisis.
That crisis will be like none other in recent memory. The US is the center of the world’s financial system. It issues the reserve currency and its debt is the world’s banking reserve. You can’t have rot at the center of things and not pay a very high price.
We don’t pretend to know the timing or all the twists and turns this process will take. But with the biggest jump in the money supply in the nation’s history, and debts higher in peacetime even than were ever run in war, we live in a world of extremes. Extreme valuations, extreme political division, and extreme debt. It is so extreme, it approaches financial and economic nihilism.
If a crypto currency like Dogecoin, which was launched as a joke, can become worth, $50 billion dollars, then the gold price can go a lot higher.
Neland D. Nobel, is a retired portfolio manager and Certified Financial Planner with 45 years of market experience in the securities and gold industry.