Chart of the week: Gold closes in on major long-term support

For the fourth time in two years gold is closing in on major long-term support at $1,525. The bullish fundamentals of negative real interest rates and unprecedented money printing should trigger large scale buying at these levels, however failure to hold the $1,525 level would be bearish for gold, at least from a technical perspective.

Thanks to a stronger US dollar, renewed optimism about the global economy, and the expectation that the Fed may soon end its QE programme, traders and investors are selling gold (and silver) and buying stocks and other risk assets instead.

As the chart below shows, having broken down out of its October downtrend channel (blue lines), gold is now closing in on major long-term support at around $1,525 (green bar).

As an interesting aside, gold is approaching major support at a time when the world’s major stock markets are approaching major resistance in the form of their all-time highs.

A 2 year daily chart of gold (Click on the chart for a larger version)

A 2 year daily chart of gold (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

It is important that gold finds strength at around $1,525, since failure to do so would undoubtedly trigger a wave of selling and would likely take gold down to the long-term uptrend line shown here.

Even if gold fails to find sufficient buying at these levels to reverse its decline, the fundamentals remain intact.

The fundamentals for gold remain intact

It’s at times like these that many market commentators will mention that mid-way through the last bull market in gold, which ran from January 1970 and January 1980, the price of gold actually fell by around 50%. This is true. However, the fall was triggered by the Fed raising interest rates which made real interest rates (i.e. the rate payable on savings accounts minus the rate of inflation) positive for a period of time.

Today real interest rates are still negative, and central banks are still printing money at an unprecedented rate. In the second half of 2013 inflation in the US, UK and Japan is likely to pick up, which will make real interest rates even more negative.

The fear among investors that the Fed will soon curtail its bond buying programme is almost certainly unfounded. As we have pointed out before, the Fed doesn’t have a realistic exit strategy, and the fact is, western governments need 4 or 5% inflation in order to escape their colossal debt burden.

What investors need to remember is that the bull market in gold is really a bear market in paper currencies. And until such times as governments and their central backs adopt tight monetary policy and begin showing fiscal discipline, gold will remain in a long-term secular bull market.

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