Gold Forecast: The Next Move Higher May Have Commenced

The price of gold popped back over $1500 last week (December futures basis) and silver moved back over $18.  The gold/silver ratio, which ran from 82 to 89 in the last week of September, has rolled over and seems to be headed lower. A falling GSR is typically a bullish indicator. 

From a fundamental standpoint, the Fed continues to reduce the value of the U.S. dollar by lowering interest rates and printing money.  Currently, not including the repo programs, the Fed is printing $60 billion per month at least until Q2 2020.  This rate of growth in the Fed's balance sheet is only slightly below the peak rate of money printing on a monthly basis at the peak of the last money printing cycle.

Notwithstanding all of the other fundamental variables that are supportive of a big move higher in gold and silver, the Fed's money printing/dollar devaluation policies should provide the fuel for a substantive bull move in the precious metals sector.

The chart above shows the SPY ETF (S&P 500) to gold ratio.  It illustrates the dollar devaluation effect of money printing and reckless fiscal and monetary policies on dollar-based assets.  Since September 2018, the S&P 500 has declined 18% when priced in gold. This includes the massive post-Christmas rally in the stock market.

The take-down in the price of gold that began in early September served to reactivate Indian imports about 2 weeks ago. India's legal importation activity had been dormant since June, after the Government raised the import duty by 25% (smuggled gold no doubt continued flowing). But escalating seasonal demand, combined with the recent price decline, has aroused a sleeping elephant. Despite the fact that the open interest in Comex gold futures is at an extreme high, suggestive of a short term market top, I believe the physical demand from the east, specifically India, along with further money printing, will push gold and silver higher in dollar terms.

One concern for gold bulls is the record level open interest in Comex gold futures. Historically an extreme high level of o/i has correlated with sharp price sell-offs. Between 2011 and 2016, an o/i level that exceeded 500,000 contracts was signal to remove speculative capital from precious metals positions. The open interest has been above 500,000 since June 11th, when the price was around $1333. Currently the o/i hit a record 681,000 contracts last week with the price at $1511.  Since moving above $1500 in early August, all sell-offs below $1500 have been short-lived.

I'll note that in the run-up in the gold price from late 2008 to late 2011, the open interest hit 650,000 on November 9, 2010 with the gold price at $1393. After a brief price decline, with o/i falling below 500,000, the price of gold jumped over $1400, running up $1898 by August 22. This move was accompanied by average open interest over that period that was 150,000-200,000 contracts below the 650k hit in November.  In other words, a significant move higher in gold occurred despite a substantive drop in Comex open interest.

The point here is that, while analyzing relative open interest levels can be a useful a short term price forecasting tool, ultimately the gold price is driven by physical demand vs supply.  Currently with India importing kilo and dore bars voraciously (based on the ex-duty spot price in India), I believe gold can move significantly higher before the end of the year:

As you can see in the chart above, since the bull market resumed in late 2015, the chart pattern has been punctuated with a series of "bull flags," each on more shallow and shorter in duration than the previous.  Technically you can see that the RSI/MACD are positioned in potentially bullish formations. With the Fed likely to further increase that amount of money it is currently printing, I would not be surprised to see gold test and/or exceed $1600 by Christmas.

Dave Kranzler publishes The Mining Stock Journal, a bi-weekly subscription newsletter

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