iGold

Gold has had a rough several months. The precious metal is down some $170 from its peak in April near $1,370, closing today just below $1,200 on the New York COMEX futures market. As we indicated in our last article, gold has failed to maintain the structure that would be indicative of a bull market in progress. That said, no market moves in a straight line, and a reversal will be in store at some point. What are some price projections as gold heads lower over the coming months where we may look to see support emerge?

There are a number of ways to estimate price targets for gold. Established support and resistance zones, Fibonacci retracements, and trend channels are just a few. However, for this article let us focus on a powerful way to gauge the potential for future gold prices – and that is: what the mining complex is expecting.

Miners Gold Price Expectations

Gold mining profits are leveraged to the underlying metal price. When the price of gold rises by 1%, gold miner profits typically rise by 2% – 3%, as the underlying costs to mine the metal remain relatively fixed. The same leverage works to the downside of course. The bottom line is that investors in the gold mining sector should have a solid idea of what the price of gold itself is going to do, as the price is a critical determinant of operational success.

That said, let us examine the figures that the gold miners are now pricing in for their own product. This can be a valuable form of analysis to use any time one is preparing to make a sizeable gold purchase.

Below we show the GDX large-cap gold miners fund on top, with the price of gold immediately below it. The GDX contains an average of approximately 50 different mining operations. Let us examine the relative valuations of the two since late-2015:

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Gold’s bottoming attempt following the 2015 low of $1,045 per ounce has failed to maintain a price structure indicative of a rising trend. Consequently, the odds have now shifted significantly that precious metals will not be in a bull market for the foreseeable future. This does not mean that the price of gold is going to crash, nor that an investment in the precious metals sector may not be wise given one’s unique situation. However, with the recent trend failure the highest-probability is that the 2016 peak of $1,378 per ounce will not be overcome for gold for at least the next several years.

Let us examine the current price trajectory and some ramifications.

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The short-term forecast for gold is clear: the metal is set to move higher. Gold has just put in an intermediate low at $1,238 per ounce as of July 3, 2018. Several leading indicators point to an imminent recovery in prices over the next 1-3 months.

However, the longer-term picture for the precious metal is mixed: gold must overcome its 2016 high at $1,378 within the next six months to avoid a significantly bearish outcome that could result in a multi-year decline following such a failure.

The time to closely monitor gold’s price action for one of these scenarios is now.

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Gold is in a primary recovery pattern as it attempts to break above its 2016 peak of $1,378 per ounce. This recovery pattern appears over and over again throughout history – the success or failure of gold to maintain the structure of this pattern will pave the way for either a massive multi-year advance higher in the sector, or a grinding decline to last for the majority of the next decade.

We will have the answer to the question of which outcome to expect within the next 12-18 months.

It will behoove precious metals investors to pay close attention to the technical action and to tune out misleading rhetoric coming from both perma-bulls and perma-bears of gold and the precious metals sector.

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