The rise in gold price since the August 2018 low has been steady and is on the path of acceleration. It is becoming a currency. Of late, gold appears to be consolidating in the area of $1,700 to $1,800.

For a trading purpose, I would take stance that if the market breaks into higher levels, it is very likely to reach a ceiling right above those levels. I will not want to buy at those high levels, since I may be buying into an overbought market. The best time to enter the market long is when the market is trading at an extreme below the mean, such as at $1,465 on 20th March after gold collapsed. Otherwise, I will keep $1,650/$1,705 as new long triggers because the narrowing premium of gold over US equities since the S&P 500 bottomed on 23rd March. From a fundamental point of view, gold is the opposite of the US dollar. Considering that the demand for US dollar, while not as extreme as it was last month, continues at a healthy level, the likelihood of further US dollar strength is greater than the opposite. That means the bias in gold should be to the downside.

However, as long as monetary rebasing continues and global uncertainties, I would argue that gold bull market since 2015 is only just getting started, and that is the way to go. I expect the outperformance in gold stocks to continue and intensify over the medium term, especially when money supply grows faster than GDP does. When Alan Greenspan took over the helm from Volcker and started to print a whole bunch of money, as money supply grew at almost twice the rate of GDP at that time, the S&P fell and gold skyrocketed. And in 2011-15 when the economy grew faster than money supply, the exact opposite happened. According to Chairman Powell, Federal Reserve is able and willing to do whatever it takes to contain this crisis. We have never seen this before!!! In every QE experience with an exception of QE3, the rise in 10-year UST has drove up gold eventually. Some central banks are building reserves. Others are making certain that gold is repatriated within their borders. Few are selling and when they do it is usually under stressed circumstances. Furthermore, with global exchange-traded funds worth over US$5 trillion, it means that the average portfolio has a mere 2% allocation to gold. I have often felt that 4-7% makes sense for a balanced portfolio and 13% to 20% for an all-weather total return fund.

Nevertheless, one needs to be reminded the wildness of gold price that goes along with it. Leading up to and during the 2008/09 Global Financial Crisis, price of gold took investors on a wild ride – running up some 30% from mid-2007 to early 2008, only to fall back down around 25% throughout the spring and summer of 2008, and finally to regroup and hit all-time highs later in 2009.

What's behind a lot of gold's rise in recent months is actually the collected enthusiasm and optimism around it. I read quite a brokerage reports that are suggesting gold prices could almost double to $3,000 by end of this or next year. Bulls are calling that gold is in the final stages of completing another near perfect “BOWL” pattern, just like in 2004. If history were to repeat, one could set your sights on $9,000 by 2027.

Chee Seng, Wong
CIO, Athena Advisors
wong-chee-seng@outlook.com