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Is Gold Preparing for a Massive Rally? Investors Believe So

Last Updated September 23, 2020 1:18 PM
Ali Martinez
Last Updated September 23, 2020 1:18 PM
  • Investors put a significant amount of capital on the line expecting gold to reach higher highs.
  • Multiple analysts believe that the current market conditions are preparing the precious metal for its next bull run.
  • The recent drop to $1,450 increases the odds for gold to surge in December.

Gold has had a fantastic year so far with a year-to-date (YTD) return of 20%. The move above the $1,370 resistance level in June was “almost perfect confirmation” that gold could climb to $1,800 or even $2,000 per ounce, according to the Brien Lundin , editor of Gold Newsletter.

Although the precious metal seems to have peaked at $1,560 in September, Deric Scott, vice president and senior analyst at Metals.com, believes that the recent retrace to $1,450 represents a “huge opportunity to buy.”  And, he is not the only one who is bullish.

On Wednesday, a pool of investors placed a $1.75 million bet that gold would triple in price. But is it realistic?

GOLD US dollar price chart
Gold moves above the resistance level that held its price for the last six years. | Source: TradingView 

Investors Expect Gold to Reach New Highs

A significant amount of gold options changed hands yesterday, according to a Bloomberg report.  During the day, 5,000 options contracts were traded at a rate of $3.50 an ounce. This is equivalent to $1.75 million. The contracts give the holder the right to purchase the precious metal at $4,000 per ounce in June 2021.

Tai Wong, the head of BMO Capital Markets, sees these options contracts similar to an “18-month term life insurance” that would sooner or later pay off. Wong considers that investors are preparing for a “quick violent move” that would take gold to hit new all-time highs.

Potential Drivers for the Precious Metal

The bullish sentiment among investors appears to be correlated with different geopolitical factors that could drive the price of gold, as stated by Deric Scott . He sees the conflict in Iran, Hong Kong, the trade war between the U.S. and China, as well as “other unforeseen, but unsurprising, actions taken by a given nation” as potential factors that may trigger the next bull run.

Nonetheless, Brien Lundin disregards the impact that geopolitical events could have on the price of the precious metal . But, he maintains that gold is currently in a bull market, which resulted from the Federal Reserved decision to cut rates and implement a new form of quantitative easing (QE).

Speaking at the New Orleans Investment Conference, the CEO of Jefferson Financial said,

Gold’s current bull run began with the Fed’s stunning shift from tightening monetary policy to loosening it. An absolute U-turn accomplished over the span of only a few short months. Political uncertainty and eruptions may move gold over short periods. And, will likely continue to affect it over the coming months. Gold bulls will have to hope for more Fed rate cuts and a continuance of the trend toward easier money.

Along the same lines, Dan Oliver, founder of Myrmikan Capital, told Kitco NEWS that monetary policies continue to be the predominant driver for gold .

Oliver affirmed,

What I look at is the balance sheet of the Federal Reserve. When [government] bonds finally break down, and they will break down someday because congress is insolvent, the only thing else on the Fed’s balance sheet is, of course, the gold, because they said they have 8,100 tonnes of gold. So, what gold did in 1980 to resolve the credit problems in that era, was to go to a price at which the gold in the Fed’s balance sheet backed its liability by 100%. That price today, if gold went to a price state that backed the Fed’s liabilities is up to $20,000 an ounce.

Shor-term Outlook

As investors bet on the long-term future of gold, the month of December is looking suitable for the precious metal. Thomas Thornton, the founder of Hedge Fund Telemetry, believes that seasonality is favorable for gold in the upcoming month .

Thornton sees the backtest of the support trendline as a positive sign for the health of gold’s uptrend. This correction allowed the moving average converge divergence (MACD) to go from overbought to oversold conditions. And, an oversold momentum indicator with low price variation is “very bullish.”

GOLD US price chart
Gold is backtesting the support trendline that developed since March. | Source: TradingView 

Thornton concluded by stating that in the near term, investors would be surprised by the continuation of the precious metal’s bullish trend.