(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Gold may be on the cusp of a significant technical breakout, one that could send the precious metal higher by as much 23 percent to $1,625. The metal is building up a head of steam as it races toward a breakout at $1,350. Should that breakout occur, the price of gold could have a clear path to rise to $1,600. But even from a fundamental standpoint, gold may benefit as inflation continues to creep back into the U.S. economy, oil prices rise and the U.S. dollar continues to weaken.
Gold has moved away from a long-term multi-year downtrend and is on the verge of breaking out of a bullish technical pattern. Gold prices may see a sharp rise because there is little technical resistance on the trading chart. The reason for the lack of resistance is because the move lower between $1,650 and $1,300 happened reasonably rapidly in 2013.
The breakout can be seen in the chart below, which shows two positive signals. The first positive sign is that gold has been able to move out of a downtrend, the orange line, in which it had been stuck since July 2011, before moving away from it in July 2017.
The second positive sign is the trading pattern, which resembles an ascending triangle – a bullish continuation pattern – notated by the two green lines. That pattern signals thst a rise in the price of gold is on the way. A breakout would occur when the price of gold rises above the upper line, which the chart above shows is very close to happening.
Gold's rise could be a hedge against rising inflation, which has been showing signs of creeping back into the U.S. economy.
The Producer Price Index Final Demand reading for December 2017 showed prices rose year-over-year by over 2.6 percent, the highest reading at the end of a calendar year since 2011.
Should inflation continue to rise, it could further fuel gold's rally, helping to push the metal up at a faster pace. One needs to pay particular attention to the speed of inflation and also the rise or fall of the U.S. dollar, as it carries an inverse correlation to the price of gold. (See also: Vanguard Chief Economist Monitoring Inflation in 2018.)
Gold has been slumbering now for a number of years, but perhaps that all will change relatively soon.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.