Precious metals have been abandoned by the investment community, with some of the latest gold price forecasts calling for spot rates to hit $1,000 per ounce, $750, or even lower.
But while most investors are throwing in the towel, a number of hidden catalysts promise to put a floor underneath the industry. In fact, the last time this happened, gold prices surged by 67%.
Let me break it down.
“This looks like the inside of an outhouse after the lightning hit,” my colleague Moe Zulfiqar told me in a conversation last week. “It’s hard to believe the prices I’m getting on gold.”
He had a point. Over the past three years, spot gold prices have fallen by more than a third. The Market Vectors Gold Miners Index has done even worse, down more than 75% over the same period.
“I never thought I would ever see our stock back at these levels,” he told me. “I couldn’t resist and purchased some shares today.”
Premature optimism? Maybe. But I agree that it sure felt like “capitulation”—panicked selling that often creates a bottom. And since our conversation, hard assets like gold and silver have found something of a bid.
Where are spot rates heading next? To update our gold price outlook, we can look to the charts for clues.
Chart courtesy of www.StockCharts.com
At first glance, gold is forming a descending triangle pattern. As you can see in the chart below, bargain hunters stepped in to buy gold every time it hit the $1,150 level. But with each successive test, the number of buyers waned. After the third try, the market broke out to the downside.
Typically, this is a decidedly bearish event. As investors who bought gold at higher prices get stopped out of their positions, prices are supposed to plunge lower. Eventually, bulls take another stand at a lower level and the process begins again.
But that didn’t happen. After a brief dip lower, gold rallied back. In fact, it’s close to closing above the $1,150 resistance line
In technical analysis lingo, we call this a “busted pattern.” And it’s a decidedly bullish event. They occur when prices break out in one direction and move less than 10% away from the breakout price, reverse, and then break out in the new direction.
We can say there were a lot of short-sellers betting against gold after it broke through the $1,150 level. But now that prices have swung the other way, they’re caught with their pants down. A break above this resistance level would force them into covering their positions, sending gold prices soaring higher.
There are a number of fundamental reasons to be bullish, too.
First, prices are so low, miners are struggling to maintain profitability. It’s no surprise that gold is hanging around the $1,150 level. Below this level, most mines are unprofitable. Producers are losing money on almost every ounce of gold they haul out of the ground.
It doesn’t take an MBA to figure out what will happen next. Eventually, small operators will go bust. Large miners will scale back operations. Eventually, prices have to return to the cost of production or the lights will go out.
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Second, hedge funds and other speculators have never been this bearish on gold. According to the Commodity Futures Trading Commission’s weekly Commitment of Traders data, hedge funds were short 119,160 contracts as of August 28. (Source: Hedge Funds Becoming Less Bearish On Gold, HedgeCo.Net, August 31, 2015.)
That represents the highest number of bearish bets ever placed on the New York gold futures market. The last time investors were this bearish on gold was October 2006, when gold was worth less than $600.00 an ounce. Two years later, gold was over $1,000. If we were to see a similar move again, gold could trade as high as $1,900.
I’m not saying we’ll see those types of gains in the near future. However, there are a number of bullish factors lining up for yellow metal prices. If gold breaks through the $1,150 level, prices could soar this September.