I am keeping a close eye on gold, and you should too
Towards a New Gold Bull Market in 2023
I want to go straight to the point.
In this post, we are going to look at why I believe Gold could be the star of 2023.
We will see that there is a confluence of elements, both fundamental and technical, pointing towards a potential new long-term secular bull market on this precious commodity.
If you want to understand why gold should be on your watchlist, keep reading. This post is going to be full of alpha.
A fertile ground for gold: negative real interest rates
Over the last few years, the big increase in central banks’ balance sheets has created a lot of inflation. This created a situation where the interest rates offered by banks on your deposits are smaller than the inflation rate. In other words: negative real interest rates.
Hence, even though you earn interest on your deposit, the actual return on your investment is negative when adjusted for inflation.
Ok cool I get that, but why it is relevant for gold?
Well, it is important to understand that historically, gold has been inversely correlated to real federal funds rates and new gold bull markets often start when real rates are negative.
A commodity that is still relatively cheap
If we go back to history, we see that the gold price is not relatively expensive.
First, let’s look at this chart:
What we see from this chart is that commodities are at a two-century low point. Looking at the past data, we could infer that the trend will likely reverse leaving gold with a big upside potential in the next years.
Then, it is important to look at how is gold priced compared to the equity market:
This chart shows the ratio between the Dow Jones (a US equity index) and gold. The higher the number, the higher are equity prices compared to gold.
Two things to keep in mind from this chart:
- First, we are at a historically high ratio of Dow Jones / Gold and are struggling to go higher. This could suggest that a reversal of a trend is expected (in support of the previous chart).
- Secondly, this chart shows us that all reversals happened at the onset of a crisis. Hence, we can argue that the 2023 banking crisis acts as a catalyst for a reversal in the trend
Central banks are rediscovering Gold
In 2022, central banks bought record levels of gold. If we expect this trend to continue, then gold could be in a good position to perform well.
A world faced with global uncertainties is bullish for gold:
Gold has been the historical edge against global uncertainties and currency debasement.
And what do we have right now?
- Geopolitical conflict: Ukraine War and tension around Taiwan.
- A banking crisis: trust has been hit in the system and gold acted as a safe haven asset.
- A USD under pressure: While the USD has been the world reserve currency for more than 50 years, this “exorbitant privilege” is currently being put under severe stress.
Hence, we could argue that the current uncertainties in the world can act as a catalyst for a new long-term bull market that has been in the making for more than 10 years (as suggested by the previous charts).
A quick recap of the fundamentals:
- Macroeconomic conditions are favorable for a new gold bull market.
- A commodity that is cheap and in the early phase of its cycle.
- Central bank adding buying pressure.
- Geopolitical tension + banking crisis as a catalyst.
What does the chart tell us?
Now that we know why gold is an asset worth looking at, let’s understand its market cycle by looking at the chart.
As gold is an asset class that evolves in long-terms cycle, it is important to first look at the monthly chart:
We can see that after a 10-year bull market, gold evolved in a big range (from 2013 to 2019).
Then, we broke out of this range in 2019 and we are currently in the first consolidation of a potential new gold bull market.
Now let’s zoom in:
In 2022, we had a breakout tentative that failed (due to the excessive relative strength of the USD compared to other currencies).
Hence, we reintegrated the range (in USD terms) and are still consolidating before a new potential breakout.
But if we look at gold against other currencies (for example AUD: Australian dollar), the chart is way more bullish:
The weekly breakout has been held. And gold is still on an uptrend.
How I will be trading gold:
I am a trend follower. Hence, what I want to see is:
- A further consolidation in the weekly timeframe (in USD terms)
- A proper breakout
Then I would consider entering into a position (and as always, with proper risk management).
For a more detailed report on gold: The In Gold We Trust report, the gold standard of all gold studies : ingoldwetrust.report
PS: this article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information is accurate. Consult a financial professional before making any major financial decisions.
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