Gold to glitter as US election looms
Despite not losing too much ground overnight, it was a rollercoaster ride for the US sharemarket with the Dow fluctuating in a range of more than 600 points as it went from a beaten down 25,440 points to make its way into positive territory at one stage as it hit a day high of 26,073 points.
The fact that the index finished down a moderate 0.1% has not taken the prospect of a recession off the table, and perhaps it was the continued strong performance of gold which was a better reflection of market sentiment.
The precious metal is best known for its safe haven qualities when uncertainty is rife, and last night it surged through the psychological US$1500 per ounce mark after flirting with that level in the previous 24 hours.
After hitting US$1520 per ounce session, gold was trading in the vicinity of US$1510 per ounce as US markets closed.
The question now is whether there is more upside to come - going by the following chart, history tells us that there is not only the prospect of further upside, but this could be the launching pad for a US$400 per ounce rally.
US$1500 per ounce to US$1900 per ounce in four months
The last time the gold price passed US$1500 in an upward trend was in April 2011 when it peaked at about US$1570 per ounce and then retraced to just under US$1500 per ounce in May/June.
However, as you can see on the chart where the line dips just below US$1500 per ounce in 2011, it was followed by a surge that saw the gold price hit an all-time high of more than US$1900 per ounce.
While the quantum of the gain was outstanding, even more mesmerising was the short time frame in which this all unfolded.
As a means of comparison, gold kicked off 2019 in the vicinity of US$1300 per ounce.
It has taken eight months to put on US$200 per ounce.
In 2011, it took about two months for the gold price to increase from US$1500 per ounce to hit an all-time high of US$1920 per ounce in early September, an increase of nearly 30%.
Whether we are in for a rally of this proportion remains to be seen, but one thing is for sure, the gold sector is looking very attractive.
Retracement could be buy time
And as we have outlined before, the decline in the Australian dollar against the US dollar which now sits south of US$0.68 is also working in favour of Australian based gold miners who are now looking at an Australian dollar gold price in the vicinity of $2250 per ounce.
This is better than the prevailing Australian dollar price when the gold price hit its all-time high in 2011.
At that stage, the Australian and US dollars were close to parity, implying an Australian dollar gold price of around US$1900 per ounce.
The fact of the matter is that the gold price could swing up to 10% either way and it would be good for investors.
Of course, the upside would imply a price of nearly $2500 per ounce in Australian dollar terms.
The downside would reflect a price of $2025 per ounce, a level that would still provide the average Australian gold miner with a margin of about $800 per ounce above operating costs.
One of the key benefits of a sizeable retracement of say 10% is that panic selling would see share prices tumble to levels that represent extremely good value.
Gold wins either way
Don’t write this scenario off as Donald Trump would only need to sip on a few green teas and Xi Jinping slam down a few Buds to restore some equilibrium.
But if your focus is solely on the gold price, my money is on sustained resilience through to the US presidential election.
To save face and stand a chance of being re-elected Trump has to stand up to China – good for gold.
If Trump folds, the uncertainty surrounding his predecessor should negatively impact markets through to US election day November 3, 2020 - good for gold.
Given this scenario, Finfeed will be devoting next week to gold, covering a wide range of stocks from microcaps to blue chips that have projects covering most parts of the globe.
With a short list already compiled, I know there is still plenty of value out there for those clambering for a chunk of the precious metal.