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Thursday, April 21, 2022
Last week, I got the call. A dear relative living on a pension who's facing soaring prices for food, gas, and medicine — along with everything else — asked me how to buy gold. Whether one considers gold a hedge against inflation or Armageddon itself — and there are arguments both ways — simple market technicals are forecasting gold prices will surge again to record highs, according to one Wall Street bank.
Monday, gold futures (GC=F) briefly topped $2,000 per ounce — less than $100 from its 2020 all-time high. BofA Securities' Paul Ciana on Monday said that "a dip from $2,000 looks like a buying opportunity." Gold subsequently dipped below $1,950 before settling at $1,955.60 per ounce Wednesday.
Ciana has been bullish on gold since early February — just before gold broke to the upside after months of consolidation. He's reiterating his bullish gold trend view with a 2022 price target of $2,175, which is "modestly" higher than the current record high of $2,089. He also has a bullish conviction on silver and believes that both gold and silver could outperform copper, bonds and "maybe oil too." But that could take a few months to play out and be confirmed, he said.
Ciana's notes that gold prices created a rounded base technical pattern from 2014 to 2019. Long bases tend to lead to outsized, sustained moves when the breakout finally happens — which it did in 2019, as he forecasted at the time.
After the new highs in 2020, gold backed off and consolidated into early 2022 before breaking out in February. Ciana's $2,175 price target uses a so-called measured move, which is calculated by adding the price range of the consolidation to the breakout apex.
Ciana also lays out the bear case for gold. The risk to his bullish view is a potential "double top" formed by the twin peaks of 2020 and 2022. "Gold would need to start selling off in the next 1-2 months, such as below the last breakout point of $1,840, to entertain the possibility of a double top and large decline," he wrote.
How high can gold soar?
That $2,175 price target is only about 11% from the current price, but it's also only a technical target in play this year. What happens beyond then, and whether gold serves as a good hedge against the current inflationary backdrop remains to be seen.
But historically, high gold prices have been mean-reverting when adjusted for inflation.
The above chart tracks the price of spot gold in U.S. dollars divided by the consumer price index (CPI) to adjust for purchasing power. After President Nixon closed the gold window in 1971, there was a huge run-up in both the price of gold and inflation during the decade. But gold got too extended in 1980 — reaching $637 per ounce. Afterward, it sold off for two decades.
Importantly, when gold peaked in 2011 at over $1,700 per ounce, the gold-to-CPI ratio was nearly perfectly testing that 1980 peak. Astute readers will note the most recent run-up in 2019 came short of those peaks and the ratio has backed off those highs a bit.
All of these leaves more potential room for gold to rise — at least by this metric — as inflation (the denominator) weighs on the ratio. Voodoo technical analysis, I know.
Back to the main point: Is my dear relative now successfully buying gold? You bet — physical. Sounds to me like more than just an inflation hedge.
What to watch today
8:30 a.m. ET: Philadelphia Fed Business Outlook index, April (20.5 expected, 27.4 in March)
8:30 a.m. ET: Initial jobless claims, week ended April 16 (185,000 during prior week)
8:30 a.m. ET: Continuing claims, week ended April 9 (1.475 million during prior week)
10:00 a.m. ET: Leading Index, March (0.3% expected, 0.3% in February)
6:00 a.m. ET: Dow Inc. (DOW) is expected to report adjusted earnings of $2.07 per share on revenue of $14.50 billion
6:00 a.m. ET: Danaher (DHR) is expected to report adjusted earnings of $2.67 per share on revenue of $7.56 billion
6:30 a.m. ET: Xerox (XRX) is expected to report adjusted earnings of 13 cents per share on revenue of $1.66 billion
6:30 a.m. ET: AT&T (T) is expected to report adjusted earnings of 75 cents per share on revenue of $37.07 billion
7:00 a.m. ET: American Airlines (AAL) is expected to report adjusted losses of $2.41 per share on revenue of $8.82 billion
7:00 a.m. ET: Pool Corp. (POOL) is expected to report adjusted earnings of $3.13 per share on revenue of $1.27 billion
7:30 a.m. ET: AutoNation (AN) is expected to report adjusted earnings of $5.25 per share on revenue of $6.51 billion
6:00 a.m. ET: Alaska Air Group (ALK) is expected to report adjusted losses of $1.59 per share on revenue of $1.66 billion
6:05 a.m. ET: Tractor Supply Co. (TSCO) is expected to report adjusted earnings of $1.42 per share on revenue of $2.92 billion
7:00 a.m. ET: Philip Morris International (PM) is expected to report adjusted earnings of $1.49 per share on revenue of $7.42 billion
8:00 a.m. ET: Union Pacific (UNP) is expected to report adjusted earnings of $2.52 per share on revenue of $5.75 billion
8:00 a.m. ET: Blackstone (BX) is expected to report adjusted earnings of $1.05 per share on revenue of $2.48 billion
4:05 p.m. ET: Las Vegas Sands (LVS) is expected to report adjusted losses of 22 cents per share on revenue of $1.08 billion
4:10 p.m. ET: Snap (SNAP) is expected to report adjusted earnings of 1 cent per share on revenue of $1.07 billion
4:15 p.m. ET: Boston Beer Co. (SAM) is expected to report adjusted earnings of $2.07 per share on revenue of $446.27 million
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