Financial Mail - Investors Monthly
TALKING TECHNICALS
Factors tug against each other but rising US interest rates provide a headwind
The gold price has spent the past five years making a large rounding bottom pattern. The gold bear market bottomed out in 2015 at US$1,050/oz. Since then the price has been gradually climbing, with successively higher lows.
There is an area of stiff overhead resistance at $1,360/oz that has proven difficult to break through in the past two years. But the pattern of successive higher lows indicates that buyers are generally the stronger force and that the probability of an eventual break to above the $1,360/oz resistance level is quite high.
A resolution one way or the other is likely in the next few months. The price is narrowing into the apex between the rising uptrend support at $1,300/oz and the overhead resistance at $1,360/oz. The higher probability outcome is for a break to the upside to occur. But, fundamentally, what are the possible headwinds and tailwinds for the gold price that could move it in one direction or the other?
A weakening US dollar should serve as a tailwind for the price of the metal. As gold is priced in dollars, a weaker US dollar naturally helps to push the dollar price of the metal higher. Rising inflation in the US would also serve as a tailwind, as would rising geopolitical tensions.
Recently when the US was threatening military action in Syria, the gold price responded with a move to the upside. Any further such tensions could push the gold price higher.
One major headwind for the value of gold, however, is rising US interest rates. Keep in mind that gold is an asset that yields nothing in terms of income or dividends. It is purely a store of value that gets locked up in vaults under the ground.
Investors in gold gain a benefit only if the traded price of the metal increases in value. This implies that there is an opportunity cost of holding gold equivalent to the risk-free interest rate. When interest rates are extremely low or near zero, as has been the case in recent years, that opportunity cost is low. However, in an environment where interest rates are rising, the opportunity cost of holding gold increases as a result of the forgone interest that could have been earned had the money rather been invested in an interestbearing investment. Rising interest rates make gold an unattractive asset class for that reason.
All of these factors are tugging against each other at present and have meant that the trading action in 2018 so far has been rather choppy and range-bound. But a resolution is likely soon.
A break above $1,360/oz would be a bullish technical development that should open further potential upside in the price. A medium-term technical target of $1,500/oz is feasible if a sustained break above $1,360 occurs.
In the event of price weakness in the immediate future, the first significant level of support is at $1,300/oz. That is where the uptrend from all the recent lows come into play, and is also where the 200-day moving average sits.
A pullback towards $1,300/oz would present a buying opportunity if the price is able to hold on to the support at $1,300/oz and reverse up off that level.
If the price were to fall convincingly below the $1,300/oz level then the bullish bias will need to be reassessed.
Time will soon tell which way the price breaks, and which of the fundamental forces wins out. A wild card would be escalating geopolitical tensions that could provide a sudden catalyst for a move to the upside.