Gold Now in a Sustained, Structural Bull Market; On Average, History Suggests ~175% Incremental Upside

The last time we discussed gold on the site was a few weeks back in this post; therein we suggested a break-down in USDZAR was at hand and that should history hold, it would help propel and/or coincide with additional upside in the metal.

However, the above was merely a tactical, nearer-term call.

Strategically, it’s been even longer since we updated our longer-term framework for gold.  In fact, it’s been three months since we did that in this post.  In that May piece we suggested the metal continued to track favorably vs. our bullish expectations, but in the near-term it faced a major test having rallied nearly +25% off its Dec-15 low, a historical demarcation point whereby cyclical retracement rallies were either snuffed out with a resumption of a secular bear beginning afresh, or, the same moves continued higher, indicative of a new secular bull being underway.

Where do we now stand vs. that +25% demarcation point?

As of month-end today, gold is up over 27% from its Dec-15 lows.

This a major milestone – any time gold has managed a move of at least 25% off a major low, it has continued higher every single time with incremental gains ranging from 21%-412%, with the average totaling 175%.

In the chart below I’ve used the vertical, dotted green lines to show any month where gold closed at least 25% off a major low for the first time; the bright green annotations show the incremental upside for the metal until another major peak was put in place following these signals; the red annotations show that gold’s two major head-fake rallies off noteworthy lows – those being the 1993 and initial 1999 lows – never managed to get to +25% off those lows, stalling out just below +24% and +17%, respectively.

2016-07-29 Gold - Rallies of at Least 25 Percent off a Major Low - Monthly

In terms of the type of incremental upside scenarios for gold that the chart above outlines, keep in mind the analog I put up in my last and aforementioned gold update post.  That analog showed that vs. history’s other major bubbles (i.e., gold-80; Nikkei-89, NDX-00, Housing-05, etc.), gold’s to-date selling off its 2011 highs had been the strongest move in history at every single post-high weekly trading juncture, looking nothing like the material weakness witnessed in the others coming off their respective highs.  Its rally since bottoming in Dec-15 has only reinforced its differences vs. the others.

Using this comparison, one is left with the fairly ineluctable conclusion that if gold was a “bubble” from 2000 onward as most have claimed, it certainly doesn’t look like its high has yet to be registered.  In that regard, if gold has rallied anywhere from 21%-412% after closing at least +25% off a major low on a monthly basis as it’s doing in July, I am much more inclined to believe that one’s expectation for incremental upside this time around should skew larger, not smaller, as its 2011 highs are a mere ~10% away.

Here’s what the analog looks like now:

2016-07-29 Post Bubble Analog - Gold - Weekly

As the above occur, the metal is getting ever closer to the $1,375-$1,450 target I suggested it could reach by the second week of August in this post from March, which was an update to an analysis we initially presented in in this February post.

That initial post noted that in rallying ~550 bps in a week where the overall CRB index fell more than 100 bps during the second week of February, gold had registered what amounted to a 99.8th percentile out-performance event that had been replicated only five previous times.  It went on to show that the few times such wide weekly performance disparities have occurred historically, they effectively always led to material upside in the metal over all forward time-frames.

The tables below show each of the historical signals, their forward returns through +24 mo and the price targets implied for gold coming off of the most recent signal during the week of 2/12/16.

Thus far, with two weeks left until we hit the +6 mo mark at 8/12/16, the +9% return off that early February signal is the lowest and is tied with the forward return off the Sep-08 signal.

2016-07-29 Gold Up at Least 550 bps While CRB Down at Least 100 Bps - Foward Return & Price Target Table

The average of all the previous signals at +6 mo is ~15%, suggesting gold could reach ~$1,420 as we approach that +6 mo milestone. However, we might want to exclude the Sep-08 signal’s forward returns at the +6 mo mark.  Remember, though gold was in an up-trend, right after this signal it temporarily crashed ~20% into Nov-08 amid GFC-forced margin call liquidations, thus impairing its returns through the +6 mo mark as rebounded from this aberration of selling.  If we exclude Sep-08, the average +6 mo gain of the others yields ~+17%, implying gold could reach as much as $1,450 in a few weeks.

Thereafter, all but the Mar-80 signal yielded additional, major gains for the metal at the +12 and +24 mo marks.  The average gain across all signals at the +12 mo mark, or as of Feb-17, is +36%, implying gold could reach nearly $1,700 by early next year! Ex the Mar-80 forward return, the average of the others at +12 mo was +47%, implying in excess of $1,800 by Feb-17!

For those that push back on the tables above being a small data set with one noteworthy negative result from Mar-80, let me remind you that the Mar-80 signal came a mere two months off gold’s all-time high follwing what had been a ~4x rally in the previous year; thus, that signal is nothing like the others, including the most recent in Feb-16, whereby gold was coming out of major recent sell-offs and just beginning sustained rallies.  Further, though small, this data set is but one more quiver in a hat bedazzled with other, corroborating quivers that have accumulated over the past year to suggest sustained upside for PMs.

In my view, the accelerated upside the table above posits for gold as we begin to work through August will likely be driven by a break-out from the bullish, descending wedge b/t lines (1) and (2) that it is currently testing the resistance of in the monthly chart below.  Said resistance line (1) runs off the 2011 high and the subsequent late-2012 retracement rally high that closely preceded the major sell-off gold then endured into Dec-15.

2016-07-29 Gold - Monthly

Another thing gold increasingly has going for it – something that could further propel accelerated upside in the nearer-term along with the break-down in USDZAR we mentioned a few weeks ago – is the recent advance in CHFUSD, which is very close to breaking out of a bullish descending wedge pattern of its own that has similarly been in place since 2011 like gold’s in the chart above.

2016-07-29 CHFUSD with Gold - Weekly

Above, note how strong the correlation b/t gold and CHFUSD have been in the pos-GFC world as both act as a sort of proxy for off-the-grid, non-conventional stores of value.  If CHFUSD breaks out soon, expect it to occur alongside fresh gold highs.