On March 16, I highlighted gold’s correction to another in a long series of higher lows. I wrote, “From a long-term perspective, the upside target is at the March 2020 $2,072 high. Gold has been making higher lows and higher highs since 1999, and the trend looks likely to continue as the economic and geopolitical landscapes support a bull market for the world’s oldest currency.”
COMEX April gold futures were at the $1,926.90 level on March 16 after trading up to $1,942.50 on February 2. Since then, the precious metal probed above $2,000 per ounce for the first time in 2023.
The GDX and GDXJ diversified senior and junior gold mining ETF products have moved higher with gold, validating the overall bullish trend. Gold could be setting the stage for another upside blast to a new record peak over the coming weeks and months.
The pattern of higher lows and higher highs continues
It has been nearly two and one-half decades of bullish price action in the gold futures market.
The chart dating back to the mid-1970s when gold futures began trading shows the bullish trend that started in 1999 at $252.50 per ounce and took the precious metal to its latest peak in March 2022. Over the period, the lows and highs have been higher.
$2,072 is the current continuous contract target
Gold first traded over the $2,000 level in August 2020, reaching $2,063 per ounce. After a correction, gold reached a marginal new high in March 2022.
The twenty-year chart shows the most recent peak at $2,072. After a correction that took the precious metal to $1,613 in September 2022, gold was back flirting with the $2,000 level in March 2023, closing the first quarter at the $1,969 level. The first upside target above the psychological $2,000 level is the technical resistance at the $2,072 nominal record peak.
At least three factors favor a move to a new high that will make $2,072 technical support
As gold approaches a new milestone, three significant issues support a move that could take it substantially above the $2,072 level, making the standing high a technical support level.
- U.S. inflation at over 6% is triple the Fed’s 2% target rate. While interest rate hikes and quantitative tightening over the past year have impacted the economy’s demand side, supply-side issues caused by the global pandemic and war in Ukraine make inflation beyond the central bank’s monetary policy reach. Gold thrives when inflation remains elevated because the economic condition erodes fiat currency value.
- Gold has historically had an inverse relationship with the U.S. dollar, falling on dollar strength and rising on dollar weakness. The dollar has been the world’s reserve currency for decades, but the bifurcation of the world’s nuclear powers has wide-ranging consequences. China is the world’s most populous country with the second-leading economy. The Chinese-Russian “no-limits” alliance and China’s trade and diplomatic overtures worldwide lower the dollar’s role in the global financial system. A less effective dollar is bullish for gold, the world’s oldest and most ubiquitous means of exchange.
- Central banks, governments, monetary authorities, and supranational institutions own gold as an integral part of foreign currency reserves. Over the past years, the official sector has been a significant net buyer. Moreover, China and Russia, two of the world’s leading producing countries, have vacuumed production to increase their strategic reserves.
These reasons alone are enough to drive gold through the $2,072 per ounce resistance level. However, the bullish twenty-five-year trend suggests that gold has a long way to go on the upside.
Mining shares follow the metal
Gold mining shares follow the metal’s price higher and lower. Since miners are leveraged to the gold price, they often outperform the metal on the upside and underperform on the downside on a percentage basis.
The GDX and GDXJ products are diversified senior and junior gold mining ETF products, holding portfolios of the leading senior and junior gold mining companies. GDX and GDXJ remove some idiosyncratic risks of owning individual mining companies that entail specific management, mine, and geopolitical risks via diversification.
The latest gold rally took the COMEX June gold price from $1,827.60 on February 28, 2023, to a $2,031.70 high on March 20, an 11.2% rise in under one month.
The chart shows the senior GDX gold mining ETF rose from $26.95 to $31.30 or 16.1% over the same period.
Meanwhile, GDXJ, the junior gold mining ETF moved from $33.03 to $37.67 per share over the period, a 14% rise.
While June COMEX gold has pulled back to the $1,986.20 level on March 31, the charts show the gold mining shares continued to rise, making higher highs, and outperforming the metal, indicating a high confidence the bullish trend in gold will continue.
Buying gold on price weakness continues to be the optimal approach
The long-term gold futures chart dating back to the turn of this century highlights that every downside correction for nearly twenty-five years has been a buying opportunity, as higher highs followed each selloff. Buying gold when the price corrects has been the optimal investment approach, and fundamental and technical factors support a continuation of the bullish trend as the gold market enters the second quarter of 2023.
Meanwhile, the last upside blasts occurred in August 2020 and March 2022. Gold could be positioned for another in 2023 that takes the metal to a level where the $2,072 record high becomes the critical technical support level on the downside.
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.
