The “Inconceivable” Is About to Happen in Gold
A Note From the Managing Editor: As Alex wrote yesterday, gold is a favorite investment among folks who insist the world is crumbling. And looking back over the decades, that bet hasn’t paid off. In Alex’s words, “Notwithstanding its recent blip, gold is way down.”
But if you ask Sean Brodrick, “blip” may not be the right word...
He’s just set a new intermediate-term price target on gold - one that represents a roughly 25% gain from recent valuations. Read on to get his rationale. And for more on the subject, check out his chat with Marc Lichtenfeld on this week’s Oxford Club Radio.
As I was walking my dog this morning, I started reminiscing about one of my favorite movies, The Princess Bride.
It actually relates a lot to what’s going on in gold right now.
If you haven’t seen the movie, I won’t be giving much away when I tell you that part of it deals with the kidnapping of a princess by a trio of bandits.
Our hero manages to outsmart the bandits at every turn. And each time, their leader shouts, “Inconceivable!”
It happens again and again.
Finally, one of the bandits turns to the leader and says, “You keep using that word. I do not think it means what you think it means.”
And this brings me to gold.
Last week, gold touched a two-year high above $1,300. And, almost immediately, it began pulling back.
The talking heads were ready to label gold’s rally as “stick a fork in it” done. But not so fast...
Because I just spotted a new technical signal on gold last week. And it’s got me setting a new minimum target we’ll probably hit by the first quarter of 2017.
My target? $1,519.
That’s about a 25% move from recent prices. Gold bears will tell you that such a move is inconceivable. But to paraphrase The Princess Bride...
That word does not mean what bears think it means.
Let me show you a weekly chart of the gold futures continuous contract, through last Friday...
Gold closed last week at $1,301. Technically speaking, that’s a big deal. It opens the doorway to much higher prices.
On the bottom of the chart, I’ve included a technical indicator I use called “Aroon.” I’ll spare you an elaborate explanation. Just know that it does a very good job at spotting both upward and downward trends.
It indicated gold was in a new bullish trend back in February, when few would believe it. Now, it’s saying this is a great time to buy.
Unfortunately, I’m betting a lot of investors will miss out. Because the price of gold fell on Friday and Monday. And it’s very hard to convince investors that it’s better to buy on a pullback than when an investment’s at its peak.
The Biggest Bullish Force of All
So, what’s driving gold’s big bull run? I already told you about several major forces lining up to push gold higher.
In case you need a recap:
- ETFs have been buying gold like crazy
- Negative interest rates are making gold more attractive by lowering its “carrying cost”
- Money is fleeing China, pouring into international real estate and gold
- An influx of refugees has crisis-minded Europeans buying gold hand over fist
- Britain’s “Brexit” vote - happening Thursday - is also giving people cause to grow their gold hoards.
These are all salient points. But today I want to focus on something else. It’s a force bigger than all the others put together...
I’m talking about the big supply-demand squeeze in world gold supply.
As it turns out, the situation may be even worse than we thought.
What we already knew is that global gold production has hit its peak. According to Thomson Reuters’ GFMS, global production of gold is expected to fall 3% in 2016.
That will put an end to seven years of rising output.
By 2018, GFMS expects that global gold mine production will fall by around 315 metric tons.
And that’s if things go well.
Mining is a business with a lot of nasty surprises. Kinross Gold Corporation (NYSE: KGC) just suspended work at its Tasiast Mine in Mauritania due to political trouble. That’s potentially 6.2 metric tons of gold supply - per year - yanked off the market.
When will the mine reopen? Stay tuned.
Tight Gets Tighter
You may be asking how the supply-demand squeeze suddenly got worse. A new report from BMI Research - based on data from the U.S. Geological Survey - says that China is mining its known gold reserves very quickly. Five times the normal global rate.
As China uses up its own domestic gold reserves, it will likely turn to the global market for more supply.
Now, there are some in China who say that new report is all wet. They suggest that China is actually adding new known gold resources. But that’s not in line with information being reported in the West. In fact...
Based on Western intelligence, much of China’s new “gold deposits” are not minable. They’re either too deep or under the sea.
The debate rages on.
One thing we know for sure is that global gold demand is soaring. The World Gold Council reports that it ramped up 21% in the first quarter of this year, hitting 1,290 metric tons. That’s the second biggest quarter on record.
Much of that demand came from ETFs and central banks. Last Friday, ETFs added another 7.3 metric tons to their holdings.
That brings total holdings to 1,890.8 metric tons.
Falling global supply from gold mines is a fact. And if the USGS data is right, China’s supply/demand squeeze is about to get much worse.
That means gold could head much higher in the near term. Which is why I think miners are on the launch pad. Any pullback is a chance to buy.
I’ll close with another quote from The Princess Bride:
“I’ll tell you the truth... it’s up to you to live with it.”
Have thoughts on this article? Leave a comment below.
P.S. In my opinion, this gold rally is just getting warmed up. Don’t forget, we are coming out of a 4 1/2-year bear market. So, a $1,519 price target really isn’t unreasonable. But there are certain ways to “supercharge” gold’s move. I’ve assembled research on a play that could hand you an exceptional gain of 400%... enough to turn every $5,000 invested into $20,000 over time. To get the full details, click here.