Those still bearish on gold prices need to take the time to pause and reflect. That’s because the yellow metal could be setting up to reward investors big-time this year.
Before going into details, please look at the daily gold price as depicted in the chart below. Pay attention to the circles I have drawn on the chart.
Chart courtesy of www.StockCharts.com
There are two things investors should take note of from the chart above:
1. When gold prices were falling in 2015, we were told that this was happening because the Federal Reserve would be raising rates. Gold prices tend to rise when interest rates fall and central banks are printing more paper money, and gold prices tend to fall when interest rates rise.
On December 16, 2016, the Federal Reserve raised rates. But something strange happened. Instead of gold prices falling as interest rates rose, the opposite occurred—gold prices rallied. This begs the question: with the Federal Reserve saying it will raise rates two more times this year, does that mean the price of gold will rise further? Well, if recent history is any indication, the answer is yes, gold prices will rally if interest rates go up again.
2. In reference to the two circles I drew on the chart, over the past few years, the 200-day moving average (MA) of gold prices (marked by the red line) has acted as a strong resistance level. As soon as gold hit this moving average, gold prices would move lower. You’ll see that in the two circles I drew in the chart.
But that trend changed in 2016. Gold prices currently sit about nine percent above their 200-day MA. Also, the precious metal’s price has been above its 200-day MA for 48 consecutive days—that’s the longest such streak since early 2013.
There are two take-away points here: first, gold prices moving above their 200-day MA suggests the long-term trend has turned in favor of the bulls; second, gold prices remaining above their 200-day MA suggests bullish sentiment is increasing and buying activity is strong.
Gold Price Outlook for 2016
Dear reader, the first quarter of 2016 was the best first quarter for gold prices in 30 years. This caught a lot of people off-guard. If you look at the big banks that were calling for the gold price to fall to $850.00 an ounce, they’ve now changed their tune.
If you are closely following gold, you know there has been a big short position on the precious metal for years now. We’ve even seen big short trades coming in at low-volume times, smacking gold prices lower.
Now, with gold prices moving higher, won’t the shorts get nervous? If gold prices spike any further, we could be in for a short squeeze in the gold market. If that happens, gold prices could skyrocket.
Where’s the Opportunity?
Over the past two years, I have been saying the shares of quality gold mining companies offer investors a great opportunity. While gold stocks have been rallying since December, I see any weakness in the price of quality gold mining companies as an opportunity.