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Gold Still Remains Bullish For The Long Term

Derek Wolfe

Updated: October 25, 2022

gold long term
Editor’s Note:

EDITOR'S NOTE: If there’s anybody out there validating the functional relevance that gold held for the long term has to offer in today’s economy, it’s the long list of central banks across the globe. The yellow metal remains an integral part of their international currency reserves. Not only does it help conserve the value of its basket of currencies, but it also gives countries a means to shift away from currencies that may make the country vulnerable (as was the case with the US dollar before all other currencies collapsed against it). Americans, however, are in a tougher spot when it comes to currency diversification. Hardly any American holds foreign currencies. Equities and debt securities are vulnerable to dollar erosion. While the answer is clear—hold physical gold and silver—many still think gold’s a relic. So, does that mean central banks are using outdated methods to protect their economies, or are average mainstream investors just a bit clueless when it comes to an understanding of real monetary value?

Gold is money and has been a means of exchange for thousands of years. Long before British pounds, the US dollar, or euros were reserve currencies, gold was the ultimate currency. Today, central banks validate gold’s role in the worldwide financial system as they hold the precious metal as an integral part of foreign currency reserves. Over the past years, central banks have been net gold buyers, with China and Russia leading the way, absorbing domestic production, and adding to their holdings. 

Gold may be down, but it is not out. The long-term bull market in gold since 1999 remains intact, with the price at the most recent low over six times higher since the $252.50 bottom twenty-three years ago. 

The long-term gold bull market

The over two-decade-long trend in the gold futures market remains bullish in October 2022. 

Source: Bar Chart

The chart highlights the pattern of higher lows and higher highs since 1999 that took the precious metal to a record $2072 per ounce peak in March 2022. While nearby gold futures were below the $1,660 level on October 24, not far above the recent September $1613 low. 

At the $1,657.50 level on the December COMEX futures contract, gold corrected 20% from the high, but the long-term bullish pattern remains intact. Rising interest rates and the strongest US dollar in two decades have weighed on the precious metal’s price. 

Russia makes a golden statement- Will China follow?

Over the past years, central banks have been net buyers of gold, with China and Russia leading the way, adding to reserves. After Russia invaded Ukraine, sanctions on Russia and Russian retaliation led Moscow to declare that 5,000 rubles are exchangeable for one gram of gold. The ruble’s value moved higher against the US dollar after Russia backed its currency with gold. 

Source: Bar Chart

As the chart shows, the ruble moved from $0.00757 against the US dollar on March 21 to over the $0.016 level on October 21, an over 110% move higher. Over the same period, the US dollar index, which measures the US currency against other world foreign exchange instruments, moved from a low of 97.90 to around the 112 level, a 14.4% rise. Russia’s move to secure its currency with gold caused the ruble to appreciate. 

Meanwhile, Russia’s “no-limits” alliance with China could eventually cause Beijing to follow and back the yuan with gold, which would only fortify gold’s role in the international financial arena. Central banks continue to hold gold as an integral part of foreign exchange holdings.

The dollar index may be at a two-decade high, but it is a fiat mirage

During the final week of September 2022, the US dollar index rose to its most recent peak at 114.475. 

Source: Bar Chart

The chart highlights the dollar index’s rise since reaching the most recent bottom at 89.165 in January 2021. Around the 112 level, the index was sitting at the highest level since 2002 on October 24, 2022. 

The euro comprises 57.6% of the dollar index. With the war in Ukraine on Western Europe’s doorstep, the euro currency dropped below parity for the first time since 2002, pushing the dollar index higher. While the dollar has rallied against the other reserve currencies, the appreciation is more a function of a weak euro and the other dollar index components than the strength in the US currency. Rising US interest rates support the dollar’s value against those currencies, but the rise of the dollar could be a mirage caused by overall weakness in the euro, British pound, Japanese yen, Canadian dollar, Swedish krona, and Swiss franc. 

Three reasons why gold will find a bottom and move to a new high

Three factors could cause gold to reach a bottom and resume its bullish trading trend over the coming weeks and months:

  • The dollar index has extended on the upside. While the trend remains bullish, it could run out of upside steam as even the most aggressive bull markets rarely move in straight lines. A correction in the dollar would likely support a higher gold price. 
  • The US central bank is on a hawkish path, aggressively increasing interest rates. The market consensus expects the fourth 75 basis point increase in the Fed Funds Rate at the next FOMC meeting. Meanwhile, declining GDP and recessionary pressures could curb the Fed’s enthusiasm for rate hikes later this year or in 2023. Rate hikes address inflation, but they foster declining GDP. A more dovish monetary policy approach, causing a bond market rally, would likely cause buying to return to the gold market. 
  • The bifurcation of the geopolitical landscape is not bearish for the gold market. Tensions have risen to the highest level since WW II, with China, Russia, Iran, North Korea, and their allies on one side and the US, Europe, Japan, and their allies on the other. Geopolitical turmoil and war can put upward pressure on gold. Moreover, as the China-Russia alliance rejects the US’s global dominance, the US currency will lose some of its footing, causing gold, the world’s oldest means of exchange, to gain value and utility.

Gold may have corrected from the high and failed at over $2,000 per ounce, but the long-term trend and fundamental underpinnings suggest that the price action will turn bullish again.  

Buying on price weakness has been the optimal strategy

Since 1999, every significant pullback in gold has been a golden buying opportunity. While the price action over the past seven months has been bearish, the over 20% decline offers an opportunity if gold’s long-term price trend remains intact. 

I am a buyer of gold on a scale-down basis, leaving plenty of room to add on further price weakness. Gold had been money and a hard currency long before dollars, euros, pounds, rubles, yuan, and all the other fiat foreign exchange instruments. Gold is a rare and precious metal that governments continue to hold because they realize and validate its value in the global financial system. Gold should be a part of all portfolios as it is an asset with long-term technical and fundamental bullish underpinnings. 

More Metals News from Barchart

On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.

Originally published on Barchart.

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