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Monday, October 21, 2019

2019 Just the Start for a New Bull Market in Gold

Will gold prices end 2019 on a high or low note? Joe Foster is confident that it will be the former, and explains his rationale here.

In a recent report, Joe Foster, portfolio manager and strategist at VanEck Gold and Precious Metals Strategy, contrasted this year's price breakout in the gold market against similar fireworks that happened in the first half of 2016. As Foster notes, the first half of 2016 saw gold prices advance by roughly $260 before pulling back and staying fairly range bound over the next three years.

Foster believes that investors are aware of the price action from a few years ago and are wary that the same thing might be happening again. However, the analyst dismisses these fears as unfounded, stating in the report that gold's performance in 2019 is nothing like the metal's previous price explosion.

Perhaps the most important thing to note is that gold has held onto the bulk of its gains with a little over two months left to the year. In comparison, gold prices began pulling back early on in the second half of 2016. Gold remains up roughly 17% since the start of this year, having held onto the critical support level of $1,500. As the end of 2019 draws closer, Foster also points to the many strong drivers that suggest a long-term move upwards for gold.

The strategist finds the factors that are propelling this year's gains to be much more pronounced. Whereas 2016 featured a hawkish Fed board and significant optimism in regards to the domestic economy, this year has painted an opposite picture. With little notice, Fed officials performed a policy U-turn around the beginning of summer and began cutting interest rates as a response to the protracted U.S.-China trade war.

Those global banks whose bonds weren't already in negative territory were quick to follow suit, with the European Central Bank's benchmark rate most recently dipping below zero. This has created a new norm of plummeting real rates and a record, rapidly-expanding $15 trillion of negative-yielding debt.

That demand for bonds, even in this environment, shows just how concerned investors are of the longest-running equity bull market in history finally changing course, adding to warnings that stock valuations are severely overblown. Global growth has also been a major concern, as factory data from some of the world's top producers hints towards a severe economic contraction in the near future.

To top things off, there have been multiple red flags signaling that a U.S. recession is on the way. Many have cited the latest inversion of the Treasury yield curve as a guarantee of an incoming recession. Those who doubt this omen may instead place their faith in the Federal Reserve, as the central bank has recently placed the risk of a domestic recession at its highest point since 2008.

Looking at the technical picture, Foster noted that gold will remain in an uptrend as long as prices hold above $1,365. While the metal has pulled back from its six-year highs, Foster and his team are certain that corrections such as these represent a minor bump in the road for what may very well be a multi-year bull market.