In early April, gold was trading at $1,740 (GLD at $157) as the Fed took interest rates to zero and started an aggressive round of easing to fend off the negative effects of the Coronavirus pandemic.
My client Mike asked me: “should we buy gold?”
I said: “not yet, but I will keep it on my radar and wait until it clears $1,920 comfortably.”
He said “What! Why would you not buy it at $1,740 but buy it at $1,950?”
I explained to him that gold stalled at around $1,900 for two years between 2011 and 2013 before falling down 40%. It also stayed at least 30% lower than the 2011 highs for about 4 years. I told him that most likely, there will be a lot of sellers in the $1,900-$1,950 range.
Those strong headwinds can make gold fail to reach a new high. It could also be that $1,900 is an interesting price for producers or gold rich countries. At this price point, producers and gold rich countries may flood the market with gold to keep a lid on the price. Whatever sellers’ reasons may be, many will stand ready to sell at or near gold’s previous all-time high which is only about 12% away.
I further added that we should probably get in once all those sellers are done and gold clears its all-time high by 2-3%. I stressed the fact that Yes! we will miss out only 12% of the run up ($1,740-$1,950) but avoid getting stuck into a losing position. Given the general market’s recent selloff of March, I explained to Mike that we can probably make that 12% elsewhere while we wait for gold to make a new high.
There is no guarantee that once gold makes a new high, it will continue to go higher. However, the potential chart formation (A multi-year cup and handle) is very positive. If gold runs, it could potentially add $1,200-$1,500 to its all-time high price of $1,920. I would expect gold to head towards $3,100-$3,500. This should represent a gain of about 70-80%.
It may take a few months or many years to reach $3,100. However, that would be my new price target after gold breaks out. Gold prices are volatile by nature, therefore, I would not recommend an allocation above 2-3% in any portfolio.
But who knows what the future holds!
Ousmane Diagne, CFA
This is not an offer (or solicitation of an offer) to buy/sell the securities/instruments mentioned or an official confirmation. Past performance is not indicative of future returns. Consult your financial advisor before making any financial decisions.
- Financial Crisis Fears To Boost Central Bank Gold Buying
- China helped Gold Breakout in Aug 2019
- China and Russia are buying a lot of Gold in Sept 2019?
- Gold Reserves by Country
- Top Gold Producers
- Gold companies by market cap
- Gold Companies