Gold Price Consolidation Points To A Strong Fall Ahead

Wednesday, June 8, 2016

gold price forecast

What a surge for gold to close the week last Friday. Prices for the precious metal climbed $35 (2.7%) for the day, ending the week at $1,243, and breaking the streak of four down weeks in a row.

The cause? The US job payrolls report, released on Friday morning, which showed that the US economy added the least number of jobs, 38,000 for the month of May during the last 6 years. This was over 120,000 less than consensus economists had predicted - and a significant shock for the markets.

Weak US job growth signals a stagnating economy, which in turn vastly decreases the likelihood of a Federal Reserve rate hike in June. Fed funds futures dropped from a 30% chance of a rate hike in June to just 4%.

We must remember that the Federal Reserve controlled interest rates are still at all-time lows between 0.25-0.50%, and that the U..central bank must continuously print money (or the electronic equivalent) in order to keep interest rates so suppressed. The Fed can only keep interest rates low by printing money to buy short bonds, which drives prices of the bonds higher, and thus, coupon yields (rates) lower. This printing of money is highly inflationary over the long run, which is why the US dollar fell and precious metals rose strongly on Friday.

Yet, the Fed cannot allow interest rates to rise amidst the overwhelming debt burden the United States faces in the coming years. The central bank is caught between a rock and a hard place.

Back To Gold

Let us place these moves into proper context so we don't get too carried away too soon.

Gold found support within the upper regions of the anticipated support zone we outlined a week ago, as shown in green below.

It would not surprise us to now see gold approach the mid-upper $1,200's within the next 2-3 weeks, before dropping back some again into mid-summer.

Gold Price Consolidation Is Very Bullish

The grinding nature of gold's price action, since the surge in February, has left many investors concerned. Why hasn't the metal continued to build upon the gains of earlier this year?

Nothing in nature moves in a straight line. Gold, a fundamental element of nature, and the markets, being the sum of human nature, are no different.

Consolidations are very healthy for markets. They represent a shifting of ownership from weak hands to strong.

We view any price action above the bottom end of our green highlighted zone at $1,176 to be an ideal setup for a strong continuation move later this year.

The reason? If gold can consolidate during this - the seasonally weakest period of the year - it will mean new demand is showing up in the market even during the months that we typically expect to see buyers largely absent.

Below we show the gold seasonality chart for the past 20 years. Note that demand typically picks up starting mid to late August, and remains rather strong through February. Meanwhile, the March - July time frame usually represents the weakest season for gold.

This is why we believe that if gold can buck the seasonal trend, and merely consolidate through the mid-summer, the precious metals will actually be showing underlying strength -- and will be setting up for a significant rally this fall.

Clues For A Fall Surge?

Do we have any clues that gold is actually showing underlying strength even amidst this grinding consolidation, and that the metal is perhaps due for a surge this fall during the seasonally strong time period?

Indeed. Below we show the relative comparison of the HUI Gold Miners Index on top with the price of gold immediately below it.

Readers should know that in precious metals bull markets, the valuations for gold mining equities typically lead the price of the metal itself, as investors factor in higher bullion prices for the companies ahead of time.

Note that using this comparison, we can see that the valuations for gold miners have already exceeded their 2015 highs, which corresponded to the spike in gold at that time to $1,305 per ounce. Meanwhile, the price of gold is still well below this figure.

What are investors in the gold mining complex expecting? Certainly, they are bidding up the valuations of these companies ahead of time for a reason.

The reason is that gold is performing strongly on a seasonal basis, given that we are currently in the midst of the weakest time period of the year.

When the seasonal strength begins to emerge for gold in August and September, we expect the price will begin to advance more rapidly and to finally exceed the elusive $1,305 figure.

As investors considering the precious metals now during the summer slow season, this is not the time to get complacent. This is the time to make wise preparations for the second chapter of the bull market that began last year. 

Christopher Aaron

Christopher Aaron began his career as an intelligence analyst for the CIA and Department of Defense. He served two tours to Afghanistan and Iraq between 2006 - 2009, conducting pattern-of-life mapping for military leaders.

Mapping shares similarities with technical analysis of the financial markets because both involve the interpretation of repeating patterns found in human nature. He is the founder of iGold Advisor, providing research on the precious metals, and iGlobal Analytics, featuring technical analysis of the global capital markets.

Christopher speaks regularly on the cyclical patterns found within the financial markets and on international policy. He has been featured in the New York Times and NPR news amongst other publications.