Is gold on the verge of breaking out?

This could be the year that gold prices hit a record.
A massive move in gold, driven in part by declines in the U.S. dollar DXY, +0.33% and Treasury bonds TMUBMUSD10Y, +3.74% , excessive optimism in the stock market, and rising inflation, may help send prices above $1,900 an ounce this year, surpassing the all-time high from 2011. “Gold has been in a stealth bull-market phase for the past few years with little notice from most investors,” says Peter Spina, chief executive of precious-metals information provider GoldSeek.com. “Gold at $2,000 is a long shot, but not an improbable target by any means.”
Barron’s John Kimelman recently flagged the gold rally, offering a number of ways to play it. Among the most popular: exchange-traded funds such as the SPDR Gold Shares GLD, +0.08% and the Van Eck Vectors Gold Miners GDX, +0.91% .

Read: Gold rally brightens the outlook for mining stocks

On Wednesday, February gold GCG8, -0.85% settled at $1,339.20 an ounce—the highest futures finish since September 2017. Gold hasn’t ended a session above $1,400 since September 2013. “Gold is on the verge of breaking out of a multiyear base that has formed between [approximately] $1,400 and $1,050,” says Jeb Handwerger, publisher of the Gold Stock Trades newsletter. If it does break above $1,400, “don’t be surprised to see moves like we saw in cryptocurrencies.” Gold, he says, could then “see a doubling in the price from $1,400 to $2,800 in 2018, especially as the Chinese have been rumored to be dumping U.S. bonds and dollars as the greenback hits new three-year lows.”
And gold’s move is much more likely to have staying power than bitcoin US:BTCF8 . “The difference between moves in bitcoin and gold is that the gold move will be sustainable, as it is driven by supply and demand, whereas bitcoin is all speculative,” he adds.

In a report released earlier this month, the World Gold Council identified themes likely to influence gold’s performance this year, including synchronized global economic growth, especially in China, home to the world’s largest gold market, and “frothy asset prices.” Adds the WGC: “Should global financial markets correct, investors could benefit from having an exposure to gold, as it has historically reduced losses during periods of financial distress.”

Meanwhile, the market expects a spike in Chinese gold demand ahead of the Lunar New Year on Feb. 16. Final demand data for the first quarter won’t be released until April, says Juan Carlos Artigas, director, investment research at the WGC, but he points out that the first three quarters of last year saw an “upward trend in China’s bar and coin demand,” compared with a year earlier.
Gold has shown persistent strength in recent weeks. On Dec. 20, gold futures started their longest winning streak on record, eventually posting gains for 11 trading sessions in a row ending on Jan. 5. “The odds are highly favorable that in the coming week or months, the [$1,350 gold] barrier will fall and the momentum will be unleashed,” says Spina, predicting prices of $1,500 to $1,600 on the upside, with “potential to reach near-prior records.” Gold futures hit a record intraday high above $1,900 in September 2011.

Some analysts, however, offered a more moderate outlook. Nitesh Shah, director and commodities strategist at ETF Securities, says his “base case fair value” for gold is “broadly flat over the coming year, as support from rising inflation will counter the downward pressure from rising interest rates.” He pegged “fair value” at about $1,280 for the year under that scenario.
But his “bull case” would see gold rise to $1,420 by midyear and settle just below $1,400 by year end—assuming only two U.S. interest-rate hikes in 2018, which would imply a more moderate rise in ICE’s U.S. Dollar Index (DXY) and U.S. Treasury yields. Strength in the greenback can dull gold’s attractiveness to holders of other currencies, and rising bond yields can hurt its investment appeal since gold offers no yield.

On the more bearish side, gold prices may fall to $1,110 by year end if the Federal Reserve delivers four rate hikes and assuming the “absence of any geopolitical risk premia or adverse financial market shock,” says Shah.

Meanwhile, Chris Gaffney, president of World Markets at EverBank, says that $2,000 gold is “unlikely” in 2018, but $1,600 is “possible.” Adds Gaffney: “Everything would need to fall into place for gold, but if we get a major black-swan event, or a major correction in the equity markets, we could easily see gold investors flock back into the market, and a 20% gain in price could occur.

the momentum will be unleashed,” says Spina, predicting prices of $1,500 to $1,600 on the upside, with “potential to reach near-prior records.” Gold futures hit a record intraday high above $1,900 in September 2011.

Some analysts, however, offered a more moderate outlook. Nitesh Shah, director and commodities strategist at ETF Securities, says his “base case fair value” for gold is “broadly flat over the coming year, as support from rising inflation will counter the downward pressure from rising interest rates.” He pegged “fair value” at about $1,280 for the year under that scenario.
But his “bull case” would see gold rise to $1,420 by midyear and settle just below $1,400 by year end—assuming only two U.S. interest-rate hikes in 2018, which would imply a more moderate rise in ICE’s U.S. Dollar Index (DXY) and U.S. Treasury yields. Strength in the greenback can dull gold’s attractiveness to holders of other currencies, and rising bond yields can hurt its investment appeal since gold offers no yield.

On the more bearish side, gold prices may fall to $1,110 by year end if the Federal Reserve delivers four rate hikes and assuming the “absence of any geopolitical risk premia or adverse financial market shock,” says Shah.

Meanwhile, Chris Gaffney, president of World Markets at EverBank, says that $2,000 gold is “unlikely” in 2018, but $1,600 is “possible.” Adds Gaffney: “Everything would need to fall into place for gold, but if we get a major black-swan event, or a major correction in the equity markets, we could easily see gold investors flock back into the market, and a 20% gain in price could occur.”

Barrons
1/29/2018