Following the worst June in several years, the gold market is attempting to gain some positive traction while the market stabilizes itself after recent selling pressure. According to the CFTC, hedge funds and large market participants remain bearish the market. Sentiment is beginning to shift, however, and the tide could soon turn for the bulls.
As bearish gold bets mount further, the market could also see increasing risk of a major short squeeze. A push above the metal’s 100-day moving average and resistance in the $1800 region could set the stage for a major upside push as shorts may scramble and look to cover their positions. The risk of a short squeeze, combined with some increasing bullish momentum, could also fuel a rally that could take gold firmly above near-term resistance while attracting more buyers into the market.
In other news, fresh Basel III guidelines could also become an increasingly bullish factor for gold in the months ahead. With new Basel rules taking effect now, gold is as good as cash on a bank’s balance sheet and that may make it more attractive for banks to increase their holdings. As these large market participants look to increase their allocations of gold, prices could see a steady rise that may also be fueled by retail investors playing “catch up” to the big boys.
Central bank activity in the gold market has already begun to run higher. Serbia and Thailand have already added more gold to their holdings, while the Central Bank of Ghana has announced its intent to purchase more bullion. These central bank purchases come at a time when inflationary pressures are on the rise and dominating much of the financial media and as central banks maintain easy money policies as the economy recovers from the viral pandemic. For central banks looking to diversify their portfolios, gold may be the best instrument outside of the dollar without choosing another currency.
Stocks remain near all-time highs and could hold the keys to a major, sustainable rally in gold. If equity markets continue to pace higher, the gold market may see weakening demand and the shorts could take over the charts, forcing prices lower into the $1600s or even lower. If the equity markets do begin to show signs of a top, however, or if a major sell-off takes place, investors may turn to gold as an alternative asset class and the market could see heavy, sustained buying that could propel it to fresh all-time highs.
As with any market and type of investment, patience is key and the patient gold investor may be substantially rewarded when the time comes. Despite recent selling and weakness, the gold market still has a variety of major economic and geopolitical factors working in its favor. These issues could send gold sharply higher, with $300 per ounce acting as an initial stop before a run towards $5000 per ounce could be seen.
With little reason for gold to move drastically lower from recent levels and a lot of reasons for gold to move sharply higher, the market may now present an excellent long-term opportunity for the patient investor with a favorable risk to reward ratio.