Features, Gold, Opinion

The gold defensive: Analysis with Regina Meani

In times of global economic uncertainty, our focus becomes defensive and what better avenue of defence than gold.

For gold investors and for our Australian gold companies the price for gold in US dollars is important as a benchmark, but for many the price for gold in Australian dollars is more pertinent.

In the supporting graphs, we look at gold in US dollars and then in Australian dollars and the correlation with the Australian/United States dollar rate (AUDUSD).

The gold price has produced some amazing bull runs. If we look back 100 years, we find that the price boomed from 1920 to 1934 and then from 1970 to 1974, from 1976 to 1980 and more recently from 2001 until 2011.

The price bottomed in 2015 pushing sideways until a new upswing was instigated in 2019; is this part of the next major bull run?

As at the end of April this year, the Comex Spot Gold price, then $US1767, was in a tenuous position.

From the longer-term perspective the price had been in uptrend since 2019, but in reaching towards $US1800 in late April it approached the shorter-term downtrend line drawn from the August 2020 high at $US2074.

The price became wedged between support around $US1750 and resistance at $US1800, and an upper trigger level was set at $US1850.

When the price clears this level, it would mean a break of the shorter-term downward path and instigate a new influence over the price.

The new influence is not necessarily an immediate upswing but could incorporate more price volatility as momentum is regained.

When the upswing resumes the next main obstacle for the price is located at $US1950 where another rebuff or pause action is likely to occur before the price can break away higher towards the major barrier located at $US2000. The price only stayed above $US2000 for four days in August 2020.

If this is part of the next major bull run for gold then we can expect that the price may experience some significant breathers along the way.

Similarities to the action experienced in August-October 2008 and May-July 2012 suggest that there is likely to be some forward and backward volatility as the trend develops.

Over the short to medium term the penetration of the key support levels around $US1750 would return the price to the downward path with a further fall through $US1670 jeopardising the path to recovery.

Turning our focus to the Australian dollar price for gold of $2284 at the start of May, we find that perhaps buoyed by the downturn in the Australian dollar against the US, the price shot to new heights in August 2020 attaining $2873.

At the time, the US dollar price for gold did not reach new highs. The Australian price became significantly overbought during the peaking process and resembled what happened with the Australian dollar/US dollar turnaround and rally in 2009.

The action saw the Australian dollar gold price declining and developing along similar lines to those from April to May 2009. Following the peak exhaustion of 2020, the price declined to support in the $2100-$2200 range. The subsequent rally lacked momentum and faltered before reaching the $2340-$2390 resistance area, which coincides with a potential meeting zone for the downward trend line drawn from the August 2020 peak.

For a breakthrough of the barriers to be verified, the price would need to move above $2400. In this case the price would find its next hurdle at $2500 and then closer to $2600.

More insight for the Australian price for gold may be gained by the outlook for the Australian/US dollar trend path.

When the Australian dollar pushed passed US 70 cents in 2003 it forged a major break in the long-term downtrend and set in motion a new path for the Australian dollar.

Initially, the Australian dollar rose to US 80 cents where it paused and consolidated its new trend in the US 70-80 cents range before breaking higher early in 2007 to reach US 98.50 cents in mid-2008.

Divergent momentum failed to confirm the high point with a top forming to trigger the 2008 plunge to support at 60 cents.

From here, the Australian dollar turned and began to recover into 2009 moving quickly towards and through the previous US 80-cent barrier to push towards the 2008 heights.

The Australian dollar fell short of the high levels in 2010, only achieving US 94 cents before halting, pausing and pulling back to touch close to US 80 cents for a rebound and another drive towards $US1.

Forcing through the barrier to $US1.10 proved unsustainable with the drop beneath the critical $US1 level tipping the Australian dollar into decline.

Support was located in 2015-2016 in the US 68-70 cent range and the Australian dollar recovered to once again tackle the US 80 cent area but failed to progress in late 2017 and early 2018, resuming the downward path to make a pandemic low at US 61 cents in March last year.

A spike and “V” reversal spurred a quick recovery which saw the price rapidly achieve US 70 cents and then US 74 cents, while keeping support around US 70 cents in September and October 2020.

From here, the Australian dollar tracked higher to reach US 80 cents again on February 25 this year. The subsequent pullback and sideways move have some elements of uncertainty, which suggests that the sideways churning action may continue to develop but may have the positive effect of rebuilding momentum.

A further pullback may be required into the US 70-75 cent support range ahead of completion of the sideways phase.

While uncertainty prevails an earlier return to the upswing is possible, but would be contingent on passing the US 80 cent barrier and then overcoming the downward trendline drawn from the $US1.10 peak currently met around US 85 cents.

On our comparison chart of the Australian dollar gold price against the AUDUSD, the similarities to 2009 suggest that if the Australian dollar can resume its uptrend through US 80 cents then the Australian dollar gold price is likely to benefit, but the indications allude to the fact that there may be more time required in preparation to support such a move.

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