On July 6, in a Barchart article, Is Now a Good Time to Buy the Dip in Precious Metals, I began the case for higher precious metals prices stating, “Every dip in gold since the bull market began in 1999 has been a buying opportunity.” Nearby COMOEX gold futures were 2.01% lower in Q2 but rose 5.65% over the first six months of 2023. Nearby gold futures settled at $1,929.40 on June 30 and were slightly higher on August 9.
Markets reflect the economic and geopolitical landscapes, which favor higher gold prices in August 2023.
The double-top slowed gold’s ascent
The continuous gold futures contract rose to a $2,072 high in May 2023.
The ten-year chart highlights the double-top formation in the COMEX gold futures market. Gold reached a record $2,072 high in March 2022.
The bearish reversal caused gold futures to drop to $1,892.50 in June. On August 9, the yellow precious metal was trading near the $1,955 per ounce level, below the midpoint of the trading range since the May 2023 high.
A new high could lead to a significant move higher
The double-top was bearish for gold over the past months but established a significant continuous contract technical resistance point at $2,072. A move above that price could unleash a flood of technical and fundamental buying.
From a technical perspective, the bull market in gold is one-quarter of a century old in 2024.
The chart dating back to 1974 illustrates gold’s 1999 bottom at $252.50. Since then, the precious metal has made higher lows and higher highs. The price eclipsed the $1,000 level for the first time in 2008 and has not traded below $1,000 since 2009. Gold made record highs steadily until 2011. After a correction, the price moved above the 2011 peak in 2020, made another marginal record high in 2022, and reached the same 2022 high in 2023. The bottom line is the long-term bull market in gold remains firmly intact in August 2023, with the first technical support level far below the current price at the $1,613 level, the September 2022 low.
The case for higher gold is compelling
While the technical path of least resistance of gold prices remains bullish, fundamentals also point to higher prices. The following factors support gold at current levels:
- Inflation at the highest level in decades makes gold an attractive investment asset.
- The geopolitical landscape supports gold prices. The bifurcation of the world’s nuclear powers has increased the potential for global conflicts, spreading beyond Ukraine’s borders.
- The potential of a BRICS currency backed by gold could threaten the U.S. dollar’s position as the dominant worldwide reserve currency.
- The dollar index declined from a two-decade 114.745 high in September 2022 to below the 103 level. A weaker dollar tends to support gold.
- After increasing short-term U.S. interest rates from zero percent to a midpoint of 5.375% in August 2023, the trajectory of rate hikes from the Federal Reserve will likely slow over the coming months and years. Gold held up well during the rate hikes. While higher rates tend to weigh on gold prices, as the markets digest the higher rates environment and rates stabilize, gold could begin to attract more investment demand.
- Central banks and governments have been net buyers of gold over the past years, adding to reserves.
When technical and fundamental factors line up in the same bullish direction, it creates a compelling case for price appreciation.
Governments continue to validate gold’s role
Central banks, monetary authorities, governments, and even supranational institutions hold gold as an integral part of reserves. The International Monetary Fund classifies gold as a foreign exchange reserve.
Gold is integral to the international monetary system, making the metal a commodity and a financial asset. Gold has been around far longer than every currency, and government holdings validate its position as the ultimate hard foreign exchange asset that transcends borders.
In 2023, gold’s profile is rising as the BRICS countries discuss rolling out a current, with gold backing, to challenge the U.S. dollar’s dominant reserve currency role. The U.S. dollar is a fiat, deriving value from the full faith and credit of the U.S. government that issues the dollar as legal tender. With U.S. debt over the $32.6 trillion level and rising and deteriorating relations between Washington and Beijing/Moscow, a BRICS currency undermining the dollar’s position may cause gold to move significantly higher over the coming months and years.
Buying dips is the optimal approach - Buying on rallies tends to cause indigestion
Buying gold on rallies has caused more than a bit of indigestion for investors. In 1980, 2011, 2020, 2022, and 2023 gold reached record highs and experienced significant price corrections. Therefore, buying on new highs has been a dangerous approach to the gold market.
Since gold is the world’s longest-standing asset, with its history as a hard currency spanning thousands of years, buying gold during periods of price weakness has been the optimal approach to diversifying portfolios.
When buying gold on dips, leave plenty of room to add on further weakness, as picking a bottom is virtually impossible.
At the $1,955 level on COMEX December gold futures, the price is over $100 per ounce below the May double-top high. Support at $1,613 means the precious metal could experience more downside price action. However, the twenty-five-year bull market in gold remains intact, and I expect we will see higher highs sooner rather than later. A break above the $2,072 level could lead to a far more significant gain than seen during the new peaks over the past few years.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
