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Gold futures nearing a technical breakout above $2100

Commentaries & Views

Blue skies smiling at me,

Nothing but blue skies do I see.

“Blue Skies” - Irving Berlin

After posting an all-time high on both a monthly and quarterly basis at the end of March, Gold Futures are nearing blue sky territory above the all-time high of $2089 made in August 2020. The most actively traded Gold Futures contract closed at $2055 on Thursday, looking to make a weekly all-time high close later today. Bullion is up about 12% year to date, whereas the benchmark S&P 500 index has gained about 8%.

With gold's current momentum, it is only a matter of time before bullion prints a monthly close above $2100 to signal a technical breakout in the metal of kings. To understand the importance of what is likely about to unfold in the gold complex, we should let history be our guide.

Two decades ago, I lost 50% of my investment capital within a year after being late to the dot com bubble party. This painful lesson led me to research gains made from the major 2001 bottom in the gold complex, while precious metals outperformed the stock market.

I discovered that when the gold price began to outperform equities in the early 1970’s, overweighting the precious metals sector paid off handsomely during the next several years after a major breakout in the gold price occurred.

Moreover, Gold Futures were forming a 12-year bullish technical price pattern into 2005 below $500 known as a Cup & Handle. After gold posted a monthly close above $500 in late 2005, the price of bullion doubled by Q1 2008.

Presently, the gold price has formed another 12-year Cup & Handle pattern since 2011 that is nearing its completion. In fact, just over the last few days Gold Futures are pushing out above the upper resistance line on the handle portion of this chart.

At the same time, the Gold/S&P500 ratio has built a bullish ascending symmetrical triangle just below the 50% level. This has been the threshold where generalist investment capital began rotating into the gold space in the early 1970’s, and again into the early 2000’s.

In the interim, the recent contraction in the money supply and current banking crisis were already signs that the world is headed into a recession that the Fed finally admitted to being probable this week. The Federal Reserve minutes report on Wednesday revealed that the FOMC projects a growth of only 0.4% for the year, while the Atlanta Federal Reserve foresees Q1 declining 2.2%.

The recent banking failures have caused the committee to foresee a “mild recession” later in the year, with a recovery over the following two years. The Fed funds rate-hike target range is now at the highest level since 2007, with another hike being probable during the next FOMC meeting on May 2-3.

As a result, the Fed will be hiking aggressively even as the economy slows further, with a debt limit fight in Congress looming as well. The U.S. Treasury Department is currently maneuvering around the $31.4 trillion debt ceiling, which the government hit in January, but it could run out of options for paying debt and other obligations by June if Congress fails to raise it or suspend it.   

The risks in the international financial architecture keep rising, and ongoing high inflation means that real interest rates will remain in negative territory with no end in sight. In addition, central banks could all too easily turn the current cyclical downturn into a severe stagflationary recession. In such a scenario, there would be hardly any assets left that would deserve investor confidence, with one exception being the precious metals complex.

The nightmare scenario of a recession, accompanied by Fed hikes, is now a very real possibility. With inflation at a 40-year high and data this week proving “stubbornly resistant” to the Fed’s efforts to bring it down, the world on the cusp of a global recession, and a conflict in Europe with the potential to turn nuclear, gold has become the safe-haven of choice.

Meanwhile, although gold miners are short-term overbought, they still have plenty of catching up to the gold price to do after massively underperforming on average over the past decade. Also, generalist investors have yet to arrive at the precious metals party with gold stock volume near 20-year lows.

However, even though precious metals miners remain under-owned, the biggest opportunity in the gold complex lies in quality precious metals juniors which have been ignored by generalists since 2013. The higher-risk junior space typically underperforms the miners on the downside, then massively outperforms both the metals and its miners during up-legs.

After several failed breakout attempts of the gold price above 12-year resistance at $2000 over the past three years, quality juniors have finally been receiving some attention since the banking crisis began in early March.

Once the gold price moves up to be worth 50% of the S&P 500, which I expect will begin to take place shortly after a monthly gold close above $2100, investors will start piling into this relatively tiny sector en masse. Just as the gold price doubled within the next two and a half years from 2005 into 2008, the technical log scale target of the current 12-year Cup & Handle pattern is $4080 by 2025.

Early contrarian speculators heavily overweighting the precious metals junior complex before this rare occurrence takes place will be in position to reap large gains. And those with the fortitude to both be right, and sit tight with a basket of full positions in quality juniors until the blow-off phase several years later, will reap life-altering gains.

My overweighting into the precious metals space just before the gold price broke out against the S&P 500 in 2005, followed shortly by a monthly close above the key $500 level, afforded me the luxury of quitting my 9 to 5 job to become financially independent by 2007.

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“Being a gold bull has taken a lot of patience, an extraordinary amount of patience. I believe that patience is about to be rewarded,” stated Peter Boockvar, chief investment officer at the Bleakley Financial Group in a Wall Street Journal cover story on Thursday. I could not agree more!

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.