Can Gold Prices Climb to $2,000 by Year-End?

July 10 (International Business Times) — Commenting on the gold price, MKS Finance head of trading Afshin Nabavi stated that “It looks like $1,630 is pretty much a brick wall, while on the downside, $1,550 is equally strong support. So unless something extraordinary happens, we will be stuck in this range…Everyone wants to get involved in gold, but they have been disappointed several times, so I think we need a confirmation that gold is really going somewhere, and that will only happen when it gets above $1,630, only then will we have some investment come back into the market.”

While policymakers in Europe have provided at least some short-term support for the markets, uncertainty surrounding the sovereign debt crisis is likely to remain a considerable headwind, according to analysts at Bank of America Merrill Lynch. In a report to clients, the firm noted that euro worries could also weigh on the gold price in the event of further broad-based liquidation in financial markets.

Nonetheless, the firm reiterated its longer-term bullish forecast for gold prices, based in large part on what it expects from Ben Bernanke and his fellow central bankers at the Federal Reserve. “Loose monetary policies, with a scope for more aggressive balance sheet use in the U.S. and Europe, will keep real rates in most reserve currencies low (or negative) during 2012,” Bank of American Merrill Lynch wrote. “We continue to believe that this will allow investor demand to remain strong and prices to reach our $2,000/oz target by the end of the year.”

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JK Comment: Buys during these consolidation periods (periods defined by range bound trading), have more often than not proven to be excellent entry points into gold through the course of this bull market. While not true of every summer, these consolidation periods have also frequently coincided with what we refer to as ‘the summer doldrums’, a seasonal pattern of tempered price movement and quiet, low-volume trading. What’s really interesting is what seems to happen in the wake of a quiet summer. Check out this graph:

Quick explanation: The average gains coming after the end of July, when compiled over the last 10 years of the gold market, have been 11.3%. The total average annual gains through this period have been 16.6%. Put another way, on average, 2/3 of all gains for the year have come after the summer months. While the past isn’t always a predictor of future performance, the current range bound trading seen this summer is in line with years where the big seasonal moves have occurred. Check out the graphs of 2009 and 2010 below:

Last year this time, gold prices were exploding upwards, on their way to a record high of $1920. In atypical fashion, gold prices actually peaked in the summer in what proved to be an ‘anything but quiet’ summer. It was followed by a significant correction through the fall months. While its unknown whether or not gold will gain significant momentum before the summer is out, if you take the center point of the current trading range ($1600) and increase 15+%, as was seen in both 2009 and 2010, you come out to $1850. To reach $2000, prices would have to increase by 25%, a post-summer performance not seen since 2007.

If Bank of American Merrill Lynch’s forecast comes to fruition, the range we currently find ourselves in will most certainly have proven another one of these seasonal opportunities, in fact, one of the best to date.

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