There’s no disputing that gold has been on quite a run for some time now.
The broad uptrend in gold began in the last quarter of 2018, when intensifying trade war fears rattled the economy. While financial markets fell about 15% during the last three months of 2018, gold jumped over 7%.
The broad move higher by the yellow metal continued throughout 2019 as it became clear the global economy was on weaker footing than it should have been after a decade of accommodative monetary policy. Then came 2020 and the onset of the COVID-19 pandemic. The resulting economic fallout has prompted stunning levels of Federal Reserve quantitative easing (QE) and government deficit spending – rocket fuel for gold. During a second quarter in which U.S. gross domestic product (GDP) fell by a worst-ever 32.9% annualized, gold flew in the other direction, jumping 13% from April through June. Gold stepped on the gas pedal even harder as it entered Q3, jumping another 13% in July. Gold owners were positively euphoric.
August has been a different story, however. Gold seems to have lost not only the momentum it was enjoying the previous four months but some actual ground, as well. As of this writing, gold is down roughly 2% this month.
So, how significant is this change in gold’s energy? Is gold just making a rest stop on the way to even bigger and better results, or could it be the remarkable run has come to a full stop?
According to experts, gold owners – and those still thinking about buying in – should look forward to more gains. Perhaps enormous gains. As for the moderation in gold’s performance, not to worry, say observers. The real drivers of gold are alive and well, and poised to provide more energy to the metal in the months to come. What’s more, as history shows, the consolidation and even backsliding we’re seeing now in the metal’s price can be par for the course when it comes to historic gold uptrends.
2008-2011 Gold Surge Marked by Consolidations and Corrections
Seeing gold flatten out is understandably disconcerting. But as the last momentous gold jump illustrates, periods of consolidation and even some down-trending during a precious metals bull market are perfectly natural. Not only that, these “hiccups” can play a role in sustaining the asset’s rise by keeping it from becoming so overvalued that it’s at risk of collapsing.
Below is a chart of the 2008-2011 gold bull run that occurred during the years of the ’08 financial crisis. You’ll notice gold rose an impressive 160%. You also will notice that the rise did not occur without bumps and bruises in the price trend. In fact, there were numerous instances where gold not only consolidated (traded sideways) but suffered corrections even as the overall trend was higher.
For example, if you look at the trend line from late February 2009 to mid-April 2009, you’ll see that gold fell roughly 12%. Gold also fell about 12% from November 2009 to February 2010. In fact, a close look at the chart reveals there was no shortage of short-term periods when gold dipped.
Performance of Gold, November 2008 to August 2011
(Chart Courtesy of StockCharts.com)
In addition to corrections, gold’s journey from 2008 to 2011 was marked by periods of consolidation, as well. Look at how gold moved from January 2010 to April 2010. You’ll notice the metal’s price moving up and down inside a fairly narrow trading range around $1,100 per ounce. Consolidations are very common while an asset’s bull market is in play. They typically represent a tug-of-war between sellers and buyers who have differing opinions in that moment of the asset’s future prospects.
To be clear, an asset can experience a trend reversal and begin dropping significantly after consolidation – just as it can continue strengthening. The ultimate direction of the breakout from consolidation typically depends on the asset’s underlying drivers. In 2010, gold resumed its upward direction after the January-April consolidation. This is because gold’s energy at that time came from the powerful pro-gold fundamentals of Fed QE and then-record deficit spending. With those influences in place, it seemed a safe bet that gold would continue rising overall.
Frank Holmes, CEO of U.S. Global Investors, says the fundamentals that were such a boon to gold last time around are the same ones that will continue pushing gold higher today, even as he acknowledges the metal is in a sideways trading pattern for the time being.
“It’s important to keep in mind…that the metal’s long-term drivers remain intact.” Holmes says. “We have unprecedented monetary and fiscal stimulus, with more potentially on the way. There’s still trillions of dollars’ worth of global government debt trading with a negative yield.”
“Bullish Outlook for Gold” Firmly in Place, Says Analyst
Ole Hansen, Head of Commodity Strategy at Saxo Bank, shares Holmes’ outlook. He recognizes gold’s current consolidation pattern and takes it in stride, believing the metal’s solid and persistent fundamentals will win the day.
“Gold is now set to be engulfed in a battle between short-term technical traders looking to sell, as the steep uptrend is broken, and longer-term buyers who missed the first move above $2000/oz.,” Hansen says. Nevertheless, he adds that “overall we maintain a bullish outlook for gold and silver with loose monetary and fiscal policies around the world supporting not only gold and silver but potentially also other mined commodities.” Hansen also points to collateral gold-favorable dynamics such as a politically volatile 2020 and deteriorating U.S.-China trade relations as forces that “are likely to add another layer of support through safe-haven demand.”
So the bullish trend for gold is expected to continue. But what does that mean in terms of price projections?
To be honest, they’re sort of all over the map. For example, Barry Dawes of Martin Place Securities sees gold at $3,500 per ounce in two years. Dan Oliver, founder of Myrmikan Capital, recently updated his gold forecast for this bull market to $10,000 per ounce. There may not be agreement on gold’s eventual price, but there does seem to be a consensus view that it will move much higher from present levels.
Gold is wobbling around right now after a stellar April through July. But when the financial crisis hit 12 years ago, gold also did more than its share of wobbling during an epic run that lasted nearly three full years and saw the metal’s price appreciate 160%. Short-term volatility in gold’s price action were no match for the metal’s fundamental drivers back then, and experts say they’re no match for those same drivers today.