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January 2019Report End of month report / chart

Gold – Coming Full Circle?

The Financial Times ran an interesting article on gold recently, entitled ’Central Bank Gold Buying Reaches Half-Century High’.

The story went on to cite various countries buying gold to shift their reserves away from the US dollar, particularly now in the face of rising global tensions.

To fully appreciate the impact of this statement, we have to look back at the evolution of gold over the past 50 years or so.

A good place to begin the review starts with the first chart in this month’s report. It is the monthly average Spot price of gold on Comex back to 1970.

The first thing that grabs our attention is gold beginning to advance in 1971 after President Nixon ‘closed the gold window’, thereby ending the conversion of gold to US dollars at the fixed exchange rate of $35 per ounce.

Several other events also contributed to gold climbing, to include instability in the Middle East; the ongoing war in Vietnam, and the 1973 oil crisis, when OPEC members declared an embargo on countries supporting Israel, resulting in sharply higher energy prices, fuel shortages, and long lines at gas stations.

The second major runup occurred in 1979, and was also sparked in part by Mideast events, another energy crisis, and severe inflationary pressures.

In January 1980, gold rose to $850 on a daily Spot basis, with the monthly average high coming in at $676 in September 1980.

From that point, it was pretty much down hill for almost twenty years. Of course, there were corrections along the way, but the overall trend saw lower highs, and lower lows, with the monthly average price finally hitting bottom at $256.55 in July 1999.

And this low point was key, because the global view at that time was that gold had lost its status as a ‘store of value’.

Imaging that! – Since biblical times, gold was recognized as the point of reference for value, and in 1999, it no longer was.

Indeed, central banks throughout the world believed gold had outlived its financial usefulness, and were racing to sell all they could before prices fell any further.

Only with the benefit of hindsight can we say that 1999 was the low, as well as the turning point for gold.

That year saw the Y2K scare when it was feared computers throughout the world would cease to operate, as they would not recognize the year 2000.

The Euro became the official currency of the European Union in 1999, and is now the second largest currency traded after the US dollar.

This period also included equity markets rising to record high levels, driven in large part by technology stocks, which became known as the dotcom bubble.

And as all bubbles go, this one also burst, taking equity markets throughout the world down sharply, and pushing our economy into a recession.

Shortly thereafter, the world witnessed the horror of 9/11/01, with the loss of thousands of lives.

Thus, gold began the long march higher, with the average price reaching a new record high of $963 in March of 2008. Later that year, the global financial crisis hit with prices for all asset classes falling precipitously, and gold fell back to $755 in November 2008.

Suddenly though, the flight to safety took hold as the global economy was facing failure, thereby forcing central bankers through the world to inject trillions of dollars into saving the system.

As for gold, it rose to a record high $1,762 in September 2011.

Needless to say, gold’s honor, reputation, and status has been fully restored.

So, from the high in 1980, it took almost 20 years for gold to find its low point, and from there, almost 11 years to reach a new high.

Today, one can say gold is approaching a critical juncture. During January, gold averaged $1,291, just shy of the $1,300 mark.

If in the event gold gets beyond $1,300 on a monthly average basis, the next objective is the $1,335 area, where a strong line of resistance is firmly in place.

A breach of this barrier opens the gates for a charge at resistance in the +/- $1,600 range, not too far from the record high.

Given the current state of global affairs, it is not inconceivable to think that gold will see a new record high.

John E Gross
February 5, 2019