By Neland Nobel
We wrote recently that the break out from $1750 should bring us to the $1800 price mark fairly quickly and that this price, formed by a number of previous peaks, (see horizontal line) created a large saucer or cup like formation that extends over about nine years. Please also see the comments on February 20, 2020 in the archives.
The market cooperated and by the end of June we starting probing the major resistance at $1800. It hit the mark several times and backed off modestly. On July 7th, gold closed comfortably above $1800 also confirmed by new 52-week highs in the gold mine stock indices. If this can hold for a day or two, we think this will prove to be a significant technical development.
There is an old saying among chartists: the bigger the base, the bigger the bang.
In the case of gold, this is one humongous base. The bang we suspect, will be something to behold.
Except for the high around $1930 in 2011, we now have four peaks just shy of $1800 which complete the “rim” of the huge saucer.
In the case of this saucer, that would be from the rim at $1800 to $1045 bottom or about $750 dollars. Thus, after breaking $1800, the market could rise from the rim at $1800 to about $2500 per ounce.
This is a target price, and it tells us little of the twists and turns the market will take to eventually get there.
This may strike some readers as reading tea leaves or goat entrails, but technical traders have worked out for years their measuring techniques from different kinds of formations.
This is a massive formation and the completion of this by a decisive break above $1800 should provide considerable room for gold to advance. Exact numbers are impossible to know.
What could cause such a large rise in the price of gold?
Remember, from the technical perspective, it does not matter. Chartists believe all information is contained in the price, and the way price arranges itself in patterns. They don’t care about fundamentals and it does not enter into their calculations. For them, the chart is everything.
Most of us though, would like a fundamental explanation to go along with the technical.
For us, it is the worldwide combination of welfare state expansion, entitlement growth due to aging of the population, and the surprise huge Covid-19 expense, which is driving all governments to spend wildly and to finance most of this with monetary creation. It is a world of expanding purchasing media, which creates a similar crisis for citizens of all countries. That crisis is, how to maintain purchasing power in a world of depreciating currencies?
This is not isolated to one country. The demand for protection will be worldwide.
In addition, the intellectual zeitgeist of the day is one of Modern Monetary Theory, as the lessons and pains of past currency inflation are obscured by new intellectual fads. Humans it would seem, do not learn from history. And today we have an added burden, people don’t even know history.
Added to this, is a sharp turn to the Left among one of America’s main political parties, a facile flirtation with socialism, and schemes of vast reparation payments to Black Americans and dreams of UBI, or universal basic income.
All of this will cost money. Lots and lots of money. Money, we would add, that we don’t have. Thus, it will be a case of borrow and spend, and print whatever is necessary to keep social peace.
To avoid the pain, some will play with crypto currencies, with equities, land, and commodities.
Gold is money as J.P Morgan once bluntly put it. It has been tested in multiple historic events going back thousands of years. It is still a major central bank reserve.
No doubt other items will get their fair share of monetary flows from those concerned about depreciating money, but gold too will get its fair share as well.
Charts courtesy of stockcharts.com. All information is derived from source believed reliable but investment results cannot be guaranteed.
Neland D. Nobel, is a retired portfolio manager and Certified Financial Planner with 45 years of market experience in the securities and gold industry.