Originally published July 5, 2019
Gold has dipped back below $1,400 this morning, as investors believe the strong employment report reduces the odds of a rate cut this year. I believe they are weighing the significance of this one highly-manicured preliminary data point too heavily and the Fed will still be forced to cut rates later this year. Therefore, I view this near-term dip in the gold price as a buying opportunity and am maintaining my price targets below.
Gold has finally awakened from a multi-year slumber. After several failed attempts over the past few years, the gold price finally broke above key technical resistance in the $1,365 to $1,375 area in late June. It immediately shot up to $1,440, but has since dipped back below $1,400 on the strong jobs report.
The RSI momentum indicator became overbought on this rally, but has since dipped back below 60 with today's correction. We are now watching for prior resistance at $1,365 to hold as support going forward. If this support fails, there is additional trendline support at $1,300.
I suspect that we could see a few more weeks of consolidation around $1,400 before the next move higher. This would be a healthy and welcomed move, as it gives the gold bull a chance to catch its breath as short-term speculators book profits.
This rally was ignited by the realization that the Federal Reserve would not be able to continue raising interest rates and instead is likely to reverse course and cut rates this year. That is a complete U-turn from past expectations and suggests that the underlying health of the economy may not be as strong as many believe.
Gold has caught a bid as a safe-haven asset in the face of significant stock market volatility and increasing concerns about another major financial crisis on the horizon.
The longer-term chart shows our forecast for the gold price over the next several years. We analyzed the last major bull cycle in order to gauge the potential magnitude of the current bull cycle that just started. As you can see, the last major run took the gold price from $250 to $1,920 in just under 10 years. This was a move of 7.6x or around 660%!
If the current bull cycle were to generate the same level of gains, it would take the gold price 7.6x higher from the 2015 low of $1,050 to $7,980 by the end of 2025.
One could certainly argue that all of the fundamental conditions that caused the last gold bull market are as bad or even worse today. Debt levels are much higher, too-big-to-fail banks are still over-leveraged, global de-dollarization has only accelerated and the Fed has much less wiggle room this time around.
Corporate debt levels, in particular, have skyrocketed and have many analysts concerned that it could trigger the next crisis. We also have major trade wars and seem to be on the brink of a war with Iran.
But even if we only estimate a move that is half the magnitude of the last major bull cycle, we are still targeting a gold price of $3,990 by the end of 2025. This calculation takes the 2015 low of $1,050 and multiplies it by 3.8 to get the low end of our target.
So, while the range is wide, we fully expect to see the gold price close out the year 2025 somewhere between $4,000 and $8,000 per ounce.
If we want a nearer-term price forecast for gold, we can follow the price trajectory in our model to predict that gold will end the year 2020 somewhere between $2,050 and $2,950 per ounce. This suggests upside of 45% to 105% over the next 12 to 18 months.
Risks to our bullish thesis include newfound fiscal discipline by the government, an acceleration of rate hikes or mining a nearby asteroid that contains enough gold to make everyone on Earth a billionaire.
I think we can safely rule out a U.S. government with the fiscal discipline to balance the budget and pay down debt. And while the recent story of a nearby asteroid (Psyche 16) containing $700 quintillion in precious heavy metals is making headlines, the costs to access and mine the metals on an asteroid would be astronomical (pun intended). Experts predict we are at least 50 years away from being able to achieve such a feat. So, I don't think we have to worry about a sudden supply glut in the gold market. Indeed, it is becoming more and more difficult and costly to find and mine gold.
Taking Advantage of Leverage from Mining Stocks
While the coming gold price gains are significant enough to make most investors salivate, the potential returns from deeply undervalued mining stocks are even more exciting. While mining stocks do not always offer strong leverage to the underlying move in the gold price, the leverage is most pronounced during the initial phases of new bull market cycles.
We have already seen early signs of this leverage, as the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) has returned more than 2x the gains of gold in 2019. I expect this leverage to increase to 3x or higher once gold breaks above $1,500 and starts moving back toward all-time highs.
This suggests that if the gold price does advance by 45% to 105% by the end of next year, the returns from mining stocks could be in the 90% to 210% range on the low end (assuming 2x leverage continues) or 135% to 315% on the high end, if my 3x leverage forecast comes to fruition. And by 2025, I am confident that many of the gold mining stocks that we cover will be 10 baggers (10x or greater returns).
No matter where the dust settles, it is safe to say that the upside potential is significant in both gold and gold mining stocks over the next few years. I view it as an asymmetric trade with a favorable risk-reward profile. This doesn't mean that investors should go "all in" at this moment, but the odds of a major bull run have increased significantly with gold taking out important resistance around $1,375.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.