Gold Price Forecast for Next Six Months: Buckle Up!

Gold is one of the best performing asset classes in 2014, outpacing the stock market by a wide margin. This is good news for gold investors, after a painful few years of correction and consolidation. Yet, if you watched only the mainstream financial media you would probably be under the impression that stocks have outperformed the “barbaric relic” gold.

So, what does the back half of the year have in store for gold prices?

Predicting short-term price movements in the precious metals sector is very difficult, due to the high levels of volatility, relatively small size of the market and ability of leverage paper players to heavily influence daily prices. Before you roll your eyes at hearing about gold market manipulation yet again, consider that in June the UK Financial Conduct Authority fined Barclays bank £26 million for manipulating “the setting of the price of gold in order to avoid paying out on a client order.” Of course, this type of action is routine at the big banks and likely just the tip of the iceberg.

Forecasting the medium and long-term price movements is quite a bit easier. Free markets tend to re-assert themselves over time and the fundamental factors such as supply and demand become the main drivers for analysis. It has been clear over the past decade, that increased demand has not been met with an equal increase in supply, as the gold price has nearly quadrupled!

I believe the gold bull market is not over, but has merely taken an extended breather. These periods of correction and consolidation can be very healthy for long term bull markets and I see no reason that it will be different for gold this time around. 

Certainly, the fundamental factors continue to support the argument for higher gold and silver prices. The total level of both government and consumer debt continues to expand, and the debt-to-GDP ratio of the United States and most industrialized nations also continues to push higher.

The dollar is slowly losing its status of world reserve currency and the petrol dollar reserve is seriously being called into question. A growing list of nations are signing bilateral trade agreements to bypass the dollar, with both China and Russia turning openly hostile towards the dollar in recent months.

We have also seen strong buying emerge at every major dip since the current uptrend in gold started. Weak hands have long been shaken from their positions and the current holders are not easily scared into selling at any sign of price weakness. These factors should help to support gold and push prices higher in the coming months. 

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On the technical side of things, we see a symmetrical triangle pattern that has developed over the past year. This pattern is easily recognized by the distinct shape created by two converging trendlines. The pattern contains a series of sequentially lower peaks and a series of sequentially higher troughs. Both trendlines act as barriers that prevent the price from heading higher or lower, but once the price breaches one of these levels, a sharp movement often follows. When layered on top of a sector that is already highly volatile and prone to sharp moves in either direction, the resolution of the current symmetrical triangle pattern has explosive potential. 

We don't yet have solid indication as to which way this movement will be, but my gold forecast  remains to the upside for all of the fundamental reasons that were just mentioned. Furthermore, the latest breakout generated a higher high versus the April peak and the price has thus far held up above both key moving averages (100-day and 200-day). The RSI has retreated from overbought levels and has room for another major push, just as gold is heading into its strongest seasonal period of the year. Taken together, these factors lead me to believe that the eventual breakout will be to the upside. 

Looking at the longer-term chart, we can see that the recent correction makes sense after such a powerful rebound that followed the financial crisis. Furthermore, specific cycles or trends start to emerge that can help us predict the potential scope of gold's next move.

First, notice how the 2008 correction retraced 50% of the prior advance. Then gold had an explosive rebound from around $700 to a new high above $1900. This gain of $1,200 was followed by a retracement of around 60% of the move. These two retracement percentages are very close the Fibonacci sequence that is a favorite predictive tool amongst technical chartists. 

Lastly, note how the 2009-2011 advance of $1,200 was a little more than double the previous advance of $550. If this trend continues, we can expect the next major advance to take the gold price up by $2,400 or more. This would result in a gold price of at least $3,600 during the next upleg, although it is likely to take between two and four years to reach this level.

Of course, none of this is a guarantee of the future price movement and all technical analysis should be taken with a grain of salt. Investor sentiment and emotions also drive prices and there are any number of black swan events that could flip the current outlook on its head. 

I believe it is best to view precious metals as a long-term investment, insurance policy and way to preserve wealth no matter the whims of bureaucrats, central bankers or emotional investors.

Also, keep in mind that the more important measure than viewing the gold price in fiat terms is how much purchasing power an ounce of gold can provide the owner. History shows gold's success at preserving wealth, but it can also be a significant generator of wealth when the purchasing power climbs increases.

In the worst case scenario of hyperinflation or a collapse of the dollar, even some of the most outrageous gold predictions could end up being low.

So, start counting your gold in ounces, not fiat money.  And lastly, buckle up as gold comes out of hibernation and begins a major breakout to the upside within the next 6 to 12 months. 

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