On the heels of a dismal performance last year, gold in 2023 could get back its shine.
Precious metals were held lower by the parabolic rally in the U.S. dollar throughout much of last year, but with the dollar giving back gains, the plow that was holding the metals markets back has been removed. Additionally, the gold market will enjoy support from seasonal tendencies and the potential for speculator repositioning in the coming months.
By September of 2022, gold speculators had liquidated nearly all of their futures market holdings for the first time since 2018. The liquidation process caused prices to collapse to $1,600.
In gold, it is rare to see a speculative position anything other than largely bullish, and such liquidation events have generally been stepping stones for fresh rallies. For instance, in 2018, a gold liquidation frenzy left the yellow metal near $1,100 per ounce; the market then spent the next two years rallying to just over $2,000 per ounce. A less impressive example is a 2015 gold speculator liquidation event that forced prices toward $1,000 per ounce and was followed by a rally to $1,400 as money made its way back into bullish gold positions. In the current scenario, we suspect speculators rebuying gold positions could increase prices to $2,100.
Chart Source: QST
We come to this conclusion with the help of the weekly gold futures chart. In this time frame, we can see the long-term trend, the aberrations that occurred because of unusual events and governmental influence, and the potential projection target defined by an uptrend line.
According to the Relative Strength Index, the trend is decisively higher, and we have yet to reach overbought territory. This should allow the overall upward momentum to continue. This zoomed-out view of price action also depicts a trendline that dates back to the 2018 low near $1,200. Although the prices of gold spent two months trading below the trendline, we see this as a byproduct of government intervention in recent years, not necessarily a failed uptrend. The current rally has allowed prices to trade back above this trendline; as long as that continues to be the case, the bulls have an edge. This trendline currently comes into play near $1,790. Thus, price action must stay above that level for the bull market in gold to remain valid.
On a target basis, we are looking for the rally to find its way back to $2,100. At that point, the gold bugs will get a chance to prove their valor. A break and hold above $2,100 paves the way to somewhere in the $2,600 area.
