Gold Approaches a Breaking Point

Gold put in a double bottom at the key support level of $1,680, and is now experiencing some bullish action to the upside. Did gold finally turn around?

Key Takeaways:

  • Gold could potentially be kicking off the next leg of the bull market following months of price declines. The technical indicators are strong, although we need a breakthrough on the upside to confirm a bullish reversal.
  • The stock market is continuing its white-hot rally, although some of the price pressures (such as the ballooning money supply, margin debt, and momentum trading) should trigger investor caution.
  • This is a fantastic time to enter the gold market, although investors need to do it in the right way. Vaulted is structured to solve the problems investors face in the gold investing industry, such as large fees, heavy upfront investments, and lack of transparency.

Higher lows and higher highs

The gold price has taken some major losses over the last few months, despite its position in the middle of a long-term bull market. Gold’s recent double bottom off $1,690 seems to be hinting that the bullish reversal has finally occurred, however, we will not be able to confirm this reversal until gold pushes through some resistance levels on the upside.

Higher lows and higher highs are the primary characteristics of bullish price action. On March 30th, gold put in a slightly higher low. The price has now reached a higher high of $1,756 following the bounce, which is a positive sign for continued gains.

We are watching gold approach a breaking point. Gold will likely meet some resistance around $1,760, which is the first short-term test. Hopefully, by next week we will be able to confirm a bullish reversal or a bearish continuation, which will indicate whether we are looking at higher prices over the next few months. If we do see a breakout on the upside, we would start looking for a stairstep pattern up to the higher pricing levels.

Other bullish indicators?

One of the biggest gold price drivers is demand from central banks across the world. Central banks hold gold reserves for the same reasons as retail investors: it is a safe haven asset and a store of value that provides protection against both inflation and deflation. China, Russia, India, Turkey, and Mexico have all increased their gold reserves in recent years. In the third quarter of 2020, central banks became net sellers of gold (perhaps taking profits after gold’s massive gains in 2020). Central banks only purchased 16.7 tons of gold in Q1 2020, the worst start to a year in decades.

However, this trend seems to be turning around. Hungary’s central bank recently tripled its gold reserves (from 31.5 metric tons to 94.5 metric tons), one of the most significant gold purchases in the last 20 years that could signal a renewed trend. Central banks are not blind to the inflationary pressures and record debt levels facing the entire world economy, and gold is looking extremely attractive at these discounted prices.

Gold’s two biggest headwinds in recent months, decreasing sentiment and the rising U.S. Dollar, seem to be approaching the end of their short-term trends. The traditional measure of gold sentiment with investors is near an all-time low, indicating that other assets have stolen the mindspace that gold once occupied. But, this sentiment always rebounds. Times of low gold sentiment have historically been fantastic times to enter the market.

The Dollar’s rally is not expected to last too much longer. The Biden Administration’s massive spending plans make it tough for investors to keep betting on a rising U.S. currency. When the Dollar drops, gold becomes a more attractive investment because gold is priced in U.S. Dollars.

The white-hot stock market

The stock market continues to explode upward, posting record gains and all-time highs nearly every week. These gains are driven by a variety of factors, including an improved economic outlook and improving consumer confidence. However, other factors driving gains are not so encouraging.

Both institutional and retail investors are borrowing record amounts of capital to pour into the stock market. The Financial Industry Regulatory Authority reported that investors had borrowed $814 billion against their portfolios as of late February. This massive increase is comparable to the amount of borrowed capital in 2008 and 2000, right before the two biggest stock market crashes in modern financial history. Taking on debt to invest in the stock market is great when the market is rallying but is also devastating when prices start to drop. Many investors are playing a dangerous game.

Another stock market driver is the momentum trade. The momentum trade has been rapidly gaining popularity and consists of buying shares of stocks that are rallying while dumping the losers. This causes massive swings in stock prices. Price movements reach breakneck speed in either direction based entirely on momentum rather than underlying company performance.

This broad stock market rally could last another 5 years, or it could end tomorrow. Fortunately, you don’t need to guess when the next crash will come – you only need to diversify your portfolio and hold some safe-haven assets such as gold (and probably be wary of leveraging margin debt).

Is now a good time to buy gold?

The short-term bear market that began last summer has provided fantastic buying opportunities for gold. It is easy to lose faith when a market hits a correction phase, although corrections are historically the best times to buy. It is tempting to exclusively buy at price peaks when investor sentiment is skyrocketing. Unfortunately, investors with this mindset often get ravaged by the waves of the market rather than using them to their advantage.

So yes, right now is the perfect time to enter the gold market. But how? Traditionally, gold investors have dealt with the following considerations:

  1. Product premiums
  2. Dollar-cost averaging
  3. Commission structure of the precious metals dealer

Investors must pay very different premiums for different gold products. Typically, the smaller the coin, the larger the premium percentage. For example, a 1-ounce gold coin might come with a 20% premium above the underlying gold value. This makes gold investing extremely expensive for everyone except large institutional investors with a massive amount of capital.

Vaulted solves this issue by allocating all investments directly to gold kilo bars. This is the most efficient way to invest in physical gold, allowing investors to avoid large spreads and premiums. It also allows dollar-cost averaging into the market, rather than having to guess when prices will start rising and dump all your capital into a gold bar.

Gold investing is an unregulated industry, which means investors must do their own research into their dealer and make sure they are getting a fair price. Vaulted never ratchets up prices, maintaining a completely transparent fee structure.

Vaulted brings gold’s 5,000-year history into the pocket of the modern investor. Open an account and speak to your advisor today – you’re not going to want to miss these buying opportunities.

Thanks for reading, and as always, happy investing!

Watch Golden Rule Radio to understand more of what’s in store for gold and other precious metals in 2021