At the start of 2016, renowned fund manager and bond king Jeff Gundlach predicted
Gold would surge to $1400/oz. That was quite the call considering Gold was
still in a bear market. He reiterated his target a few days ago in a webcast.
Gold closed the week below $1260/oz after reaching as high as $1287/oz following
the ECB decision. Corrections in both Gold and gold stocks have been limited
to swift declines lasting no more than two days. While we cannot predict the
future, we think there is some chance that Gold could reach Gundlach's target
before a sustained correction.
Below is the Gold recovery analog chart or bull analog chart. We compare the
current rebound to those from major lows seen in 1976 and 2008. By the way,
it is great to be constructing bullish analogs rather than bearish analogs.
As we can see, if this recovery in Gold continues to follow the path of those
two recoveries then Gold could reach $1400/oz before correcting. The analog
hints that if Gold reached $1400/oz then it could correct $100-$120/oz.
While Gold's monthly and quarterly charts show very strong resistance around
$1330/oz, its weekly chart argues that $1400/oz is the next major target after
$1300/oz. In other words, if Gold can make a weekly close above $1300/oz, then
it has a chance to run to $1375 to $1400/oz. Note that $1375 is the 38% retracement
of the entire bear market. Initial resistance is $1300, which is the measured
upside target from Gold's recent, small breakout.
Note that Gold's current net speculative position is 39% of open interest.
While this appears bearish in the recent context of a bear market, Gold is
now in a bull market. From 2001 to 2012, Gold's net speculative position, when
high, ranged from 50% to 60%. Moreover, the current net speculative position
remains below 2014 to 2015 highs of 44% and 49%. If Gold wants to move above
$1330/oz and towards $1400/oz, the current setup of the commitment of traders
report won't stop it.
Furthermore, open interest in Gold surged to 499K contracts. That is the strongest
open interest in more than 4 years! Rising open interest usually confirms an
uptrend. Note that from December 2001 to May 2002 open interest increased 90%.
From December 2008 through March 2009, open interest increased 50%. Over the
past five weeks open interest has increased by 30%.
When a market makes a strong rebound following a difficult bear market, investors
and pundits suddenly become cautious due to the subconscious fear that the
bear will reassert itself. We have even made the same mistake in recent weeks,
thinking Gold and gold stocks would correct before another strong leg higher.
While the possibility remains, there is equally as much evidence that Jeff
Gundlach is right and Gold will reach $1400/oz before any setback. Gold and
gold stocks have refused to correct for more than a few days at a time. Do
not be surprised and unprepared if this run continues. Also, any extended weakness
in Gold or gold stocks is a buying opportunity.
