As gold springs back to life, David Jones investigates whether this is a time to take profits or to prepare for a much bigger move over the longer term.
We last took a look at the price of gold in March. It had enjoyed a good run since the summer of 2018, but had struggled a little in the short term. Despite this, I felt that it could still be an attractive option for investors for the rest of the year. And any holders will have been well rewarded, as the price of gold has rocketed between mid-May and the third week of June, by around $140 an ounce – or 11%.
As usual, the obvious question now is whether it is time to sell – or whether there are even more gains to come. So, let’s figure out what the rest of 2019 could hold for gold.
Why the sharp rise in the gold price?
The price of gold has been rising since mid-August 2018, and some simple chart analysis shows that the trendline since then has done a great job of stopping any weakness. The arrows in the chart below highlight where the trendline has been tested and stopped the price from falling further.
Gold price August 2018 – June 2019
You can see that the gold price has turned in a somewhat pedestrian performance for a good three months from the February highs at $1,346 through to the May lows set at $1,266. This was a sizeable decline that frustrated long-term holders (me included). But then things changed.
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There are a couple of major drivers here that swung sentiment back to the bullish side for gold. Firstly, since the third week of May, the US dollar has been under some pressure. If we treat gold as just another currency pair, then a falling dollar means the price of gold will rise.
But the bigger factor is that old favourite for gold bull markets – global uncertainty. In June, Iran shot down a US military drone. Understandably, this increased tensions between the two countries, with the US apparently poised to take action. At the time of writing, this has not happened – but in times of unease, gold becomes an attractive safe haven for investors, and this incident has definitely played its part.
The ongoing trade war between China and the US is an important factor for consideration too. Leaders of both countries are due to meet to see if some progress can be made – but the trade war remains a threat to the world economy, which again enhances the attractiveness of gold as an investment.
The only ingredient missing to create a ‘perfect storm’ is falling stock markets. The broader US index, the S&P 500, hit all-time highs during June – seemingly unperturbed by the global political and economic ripples. But the rise in the price of gold seems to demonstrate that investors are still willing to hedge their bets, given that stock markets have now been rising for more than a decade.
Is the gold rally set to continue?
Let’s just put the gold-price rise into longer-term context.
Gold price 2013 – June 2019
In the above chart, you can see that the price has cleared some major obstacles to hit its best levels in more than five years. It has sailed through the July 2016/7 highs at $1,375. However, these were a barrier once again in January 2018 and put an end to the rally from the year before.
On top of this, the 2014 highs at $1,392 (plus the ‘psychological’barrier of $1,400) caused hardly a stutter in gold’s surge. There are still some big technical barriers left on the chart, running from $1,450 through to $1,500. So, despite being a holder of gold, I am tempted to suggest that perhaps the rise has gone far enough for now and is looking a little overstretched. But that does not mean that there will not be opportunities in the weeks ahead.
Looking at shorter-term uncertainty, if there is military action between the US and Iran – and if the trade war escalates – this can only be bullish for traditional safe havens such as gold. More investors will be looking for a secure destination for cash – and more buyers should mean that the price of gold rises. But for the speculator, perhaps the most sensible view is to expect a de-escalation. Iran backing off from the threat of a US military strike and the US and China trying to find some more common ground on trade tariffs seems the more likely outcome. This should take some of the wind out of the sails of the gold price – and this is where the patient investor may have an opportunity.
Gold price February to June 2019
The gold price does look overstretched over the past month or so – but there will be plenty of people who will feel they have missed the boat. Moves like this in major markets tend to not perform a U-turn overnight and I would be tempted to think the sensible position here is to wait for some weakness. However, if the price were to sell off towards the $1,300/1,350 area and strength starts coming in, it could be an opportunity to jump on board for another move above $1,400.
Of course, the risk here is that the price of gold carries on rising and hits $2,000 without any decent pullback – but this is not Bitcoin (famous last words!). There tends to be a bit more of a normalised ebb and flow in these more mature financial markets and it would not surprise me if the gold price gives up at least some of these gains in the weeks ahead, which could well be a better opportunity for the more disciplined investor.
Either way, the last month has seen the price of gold finally stop sliding, which should result in a very interesting second half of the year for this precious metal.