iGold

It is often said that in market analysis: “volume precedes price movement.”

Gold has just posted its highest quarterly volume of all-time for futures trading history, for the quarter ended September 30. The closing data shows that for the period, over 17.5 million contracts traded hands. This eclipsed the previous record volume by a whopping 3.5 million contracts. What’s more, the new record surpasses the number of contracts that were traded during the quarter in which gold made its all-time price high of $1,923 per ounce, which came in Q3 of 2011.

Something is happening here in the gold market, for those who would pay attention to the hints now presenting themselves.

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Gold is retesting its 2016 – 2017 consolidation breakout, and the decline seen over the previous two weeks provides an ideal opportunity for precious metals investors to make final purchases before the technical model suggests that 2016 highs will be exceeded for good.

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While ownership of physical gold should be the cornerstone of a precious metals portfolio, we are overweight the miners at this juncture. Despite gains of 100% – 500% in 2016, the gold mining sector is still historically undervalued relative to gold.

Throughout history, ratios between real asset classes revert to the mean when they become radically undervalued, and this time will prove no different. For those contrarian-minded investors who have a higher tolerance for reward and risk than the above targets for gold bullion alone would provide, the opportunities in the gold producing equities are quite significant.

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Gold has finally broken out of a simple yet powerful technical boundary – the declining linear trendline which defined the 2011 – 2017 period in precious metals prices. The ramifications for this breakout are significant and we expect higher gold prices are in store for the next year at minimum.

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Since gold’s all-time high of $1,923 per ounce in September 2011, the nearly 6-year decline that this week has brought prices back to $1,270 has been broadly defined by a falling linear trend of selling pressure. This declining trend is being tested immediately, and a breakout higher would be a major signal that gold’s period of falling prices has come to an end. However, caution is warranted as leading indicators are still flashing warning signals for precious metals prices.

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Unfortunately for gold, we are living through one of those anomalous time periods in which the US dollar and precious metals are positively correlated – but to the downside.

Throughout history, gold tends to have its strongest moves when the US dollar is losing value, as gold receives bids from those looking to protect their savings against a decline in the world’s reserve currency.

However, as we can see at right, especially since the Federal Reserve meeting in mid-June, both the US dollar and gold have moved in the same direction: lower.

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