$1800 Pivot Point in Gold: Pros and Cons for the Precious Metal
Gold has been coveted by humans long before there were stocks, bonds, currencies, and other investable assets. The precious metal outdates the Bible’s old testament, with more than four hundred references to gold. Gold is a forever commodity as each ounce of the metal ever produced in the history of the world remains as part of the global stock. Around 197,576 tons of gold have been mined throughout history, with approximately two-thirds mined since 1950.
Miners extract approximately 2,500 to 3,000 tons of gold each year, adding to the above-ground stockpiles. Gold is a unique asset as it is a store of value or currency and an industrial metal.
At the $1800 per ounce level at the start of February 2022, gold’s price was over seven times higher than the 1999 low of $252.50 per ounce. In 1999, the United Kingdom decided that gold was a barbarous relic of days gone by and sold half of the country’s reserves via an auction. The misguided decision created a bottom in gold, which has been in a long-term bullish trend for more than two decades.
Gold’s role in the worldwide financial system has supporters and detractors. Perhaps the most significant validation of gold as a store of value comes from governments and monetary authorities that continue to hold the metal as an integral part of foreign currency reserves.
Gold rallied early in 2022 but ran out of upside steam
April COMEX gold futures were at the $1832.10 per ounce level on December 31, 2021. After a dip to $1783.80 on January 7, the precious metal rallied through January 25.
The daily chart highlights the rally from $1783.80 to a high of $1856.70 on January 25. The over 4% rally occurred as the total number of open long and short positions in the COMEX gold futures market rose from 502,717 contracts on January 4 to 572,078 contracts on January 25, a 13.8% increase in the open interest metric. Price momentum and relative strength indicators rose with the price.
Meanwhile, the January FOMC meeting ended the gold rally as the central bank told markets that quantitative easing would end in early March and the Fed Funds Rate would rise. The prospects for higher interest rates lifted the dollar index over the 97 level. After the Fed meeting, the rising dollar and higher rates weighed on gold, pushing the price back to the $1800 equilibrium level.
$1800 has been magnetic
For months, the $1800 per ounce level for nearby COMEX gold futures has been a pivot point.
The weekly chart (featured above) illustrates the magnetic force of the $1800 level throughout 2021. Each time gold moved above or below the price that became a pivot point, gold returned to the level. Meanwhile, gold has made lower highs and higher lows since March 2021. The wedge formation suggests that a substantial move is on the horizon as gold straddles the $1800 level, but it is taking its time to develop.
2021 was an inside year for gold
In 2021, gold did not make a higher high or lower low than in 2020. The trading range on the nearby COMEX futures contract in 2020 was from $1450.90 to $2063 per ounce, or $612.10. For 2021, it narrowed to $1673.30 to $1962.50 per ounce or $289.20, less than half the previous year’s trading band. The inside year came as gold digested the move to its all-time high at $2063 in August 2022. The price action reflected consolidation, and the wedge pattern since March 2021 suggests an upside bias for the precious metal.
The factors supporting gold
Gold may not have moved higher with many other commodities in 2021, but the metal remains an inflation barometer. The following factors support gold in 2022:
While the case for a higher gold price is compelling, short-term bearish factors are lurking.
The issues weighing in the precious metal
The bear case for gold includes:
Gold has been a store of value and means of exchange for thousands of years and remains the oldest and most coveted asset. In early 2021, gold continues to trade around its magnetic $1800 pivot point, and I continue to favor the upside for the metal. While I follow the short-term trend and trade from the long and short sides of the market during the current consolidation period, I invest all profits in physical gold as the long-term trend and history favor gold’s continued role as an asset with staying power.
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Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
- Gold rallied early in 2022 but ran out of upside steam
- $1800 has been magnetic
- 2021 was an inside year for gold
- The factors supporting gold
- The issues weighing in the precious metal
Miners extract approximately 2,500 to 3,000 tons of gold each year, adding to the above-ground stockpiles. Gold is a unique asset as it is a store of value or currency and an industrial metal.
At the $1800 per ounce level at the start of February 2022, gold’s price was over seven times higher than the 1999 low of $252.50 per ounce. In 1999, the United Kingdom decided that gold was a barbarous relic of days gone by and sold half of the country’s reserves via an auction. The misguided decision created a bottom in gold, which has been in a long-term bullish trend for more than two decades.
Gold’s role in the worldwide financial system has supporters and detractors. Perhaps the most significant validation of gold as a store of value comes from governments and monetary authorities that continue to hold the metal as an integral part of foreign currency reserves.
Gold rallied early in 2022 but ran out of upside steam
April COMEX gold futures were at the $1832.10 per ounce level on December 31, 2021. After a dip to $1783.80 on January 7, the precious metal rallied through January 25.
The daily chart highlights the rally from $1783.80 to a high of $1856.70 on January 25. The over 4% rally occurred as the total number of open long and short positions in the COMEX gold futures market rose from 502,717 contracts on January 4 to 572,078 contracts on January 25, a 13.8% increase in the open interest metric. Price momentum and relative strength indicators rose with the price.
Meanwhile, the January FOMC meeting ended the gold rally as the central bank told markets that quantitative easing would end in early March and the Fed Funds Rate would rise. The prospects for higher interest rates lifted the dollar index over the 97 level. After the Fed meeting, the rising dollar and higher rates weighed on gold, pushing the price back to the $1800 equilibrium level.
$1800 has been magnetic
For months, the $1800 per ounce level for nearby COMEX gold futures has been a pivot point.
The weekly chart (featured above) illustrates the magnetic force of the $1800 level throughout 2021. Each time gold moved above or below the price that became a pivot point, gold returned to the level. Meanwhile, gold has made lower highs and higher lows since March 2021. The wedge formation suggests that a substantial move is on the horizon as gold straddles the $1800 level, but it is taking its time to develop.
2021 was an inside year for gold
In 2021, gold did not make a higher high or lower low than in 2020. The trading range on the nearby COMEX futures contract in 2020 was from $1450.90 to $2063 per ounce, or $612.10. For 2021, it narrowed to $1673.30 to $1962.50 per ounce or $289.20, less than half the previous year’s trading band. The inside year came as gold digested the move to its all-time high at $2063 in August 2022. The price action reflected consolidation, and the wedge pattern since March 2021 suggests an upside bias for the precious metal.
The factors supporting gold
Gold may not have moved higher with many other commodities in 2021, but the metal remains an inflation barometer. The following factors support gold in 2022:
- According to the 2021 readings for the consumer and producer price indices, inflation is at the highest level in four decades. At the $1800 level, gold remains far above the 1980 high of $875 per ounce on the nearby futures contract.
- Central banks and governments continue to hold and accumulate gold and classify the metal as part of foreign currency reserves. The classification as a currency and reserve asset validates gold’s role in the worldwide financial system.
- Inflation is a challenging beast to tame. The US Fed has stated that it expects inflation to worsen before it improves.
- Bank of America recently forecast that the Fed will increase short-term interest rates seven times in 2022, lifting the Fed Funds Rate to the 1.75% level by the end of the year. With core CPI at 5.5% and PPI near 10%, even a decline in inflation will keep short-term interest rates in negative territory, supporting higher gold prices.
- Gold’s path of least resistance is a function of investment demand. If the wedge pattern resolves to the upside, expect trend-following buyers, speculators, and investors to pile into the gold market. Bullish trends often become self-fulfilling prophecies.
- Every dip in gold since 1999 has been a buying opportunity. The $1800 level does nothing to negate the long-term bullish trend. Critical support for the over two-decade bull market sits at the March 2020 $1450.90 low, around $350 below the current equilibrium level.
While the case for a higher gold price is compelling, short-term bearish factors are lurking.
The issues weighing in the precious metal
The bear case for gold includes:
- Higher interest rates increase the cost of carrying gold. Gold competes with other investment assets for capital. Rising interest rates tend to weigh on the price.
- A rising dollar tends to be a bearish factor for the precious metal. The dollar is the world’s reserve currency and the pricing benchmark for most commodities, including gold.
- Gold disappointed investors in 2021. The metal would need to break significantly higher, perhaps over the $1900 level, to entice them to come back and buy the precious asset.
Gold has been a store of value and means of exchange for thousands of years and remains the oldest and most coveted asset. In early 2021, gold continues to trade around its magnetic $1800 pivot point, and I continue to favor the upside for the metal. While I follow the short-term trend and trade from the long and short sides of the market during the current consolidation period, I invest all profits in physical gold as the long-term trend and history favor gold’s continued role as an asset with staying power.
--
Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.