3 Reasons Why Gold Prices Will Soar
Gold has trended lower for the last two weeks, undercutting its March and January lows.
This has gold bulls worried the yellow metal could slip even lower, perhaps erasing all its gains since last fall.
But I don’t believe a bigger correction in gold is about to play out, for several reasons.
The Dollar Is Throwing Its Weight Around
First, the main reason for gold’s recent weakness has everything to do with temporary dollar strength, as you can see below.
The U.S. dollar index notched new 52-week highs recently, and gold has always had a strong inverse relationship with the buck.
But I believe the dollar rally will be short-lived. That’s because as U.S. government debt and budget deficits continue to soar, they will inevitably sap the dollar’s strength in favor of gold and other hard assets.
The main reason why you should expect higher gold prices is the fact that the metal has already pulled back significantly from its 2011 high. As a result, this has triggered widespread cutbacks in exploration budgets in the gold mining sector, as you can see below.
New Gold Discoveries Are Few and Far Between
In fact, there haven’t been any new, large-scale gold mine projects or discoveries in years. In 2016, total exploration budgets for precious metals bottomed out at just $7.3 billion before rebounding somewhat the last two years, according to S&P Global Market Intelligence.
That marked an 11-year low for mining exploration, and industrywide exploration and production remains far below peak levels from 2010–2012.
This means global gold supply is shrinking, even as demand remains steady now and is poised to surge much higher.
Lastly, if you take a closer look at the technical pattern, you can see that all we are witnessing right now is a brief retracement of the earlier gains. It’s just a pause that will refresh gold and other precious metals for higher prices ahead.
Technically Speaking, a Rally’s Still Coming
Any market, whether stocks, bonds, commodities or currencies, typically follows very similar technical patterns. After a big rally, it’s not uncommon to experience a correction, or retracement, of anywhere from one-third to one-half of the previous gain.
As you can see in the chart above, gold has already given back about one-third of its gain since the 2018 low, the target is around $1,275 and gold is already trading back above $1,290 today, powered by more trade war worries.
This tells me the bottom may already be “IN” and gold is following my likely Scenario 1 in the chart above, already starting its next move higher in price, or…
Gold could follow Scenario 2 and pull back a bit more to the 50% retracement level at $1,255.
But that’s a small drop of only about 2% from here, hardly worth losing any sleep over.
And even if Scenario 2 comes to fruition, I expect gold to turn and rally substantially higher from there.
Bottom line: This pullback in gold is nothing to worry about because the long-term fundamental drivers for higher gold prices are still in place. Consider adding some to your holdings if you haven’t already.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch