Matthew Gladden

Throughout history, gold has been used as a tool for bartering or trading.

The first extractions by man in North Africa, Mesopotamia, the Indus valley, and the eastern part of the Mediterranean date back to around 6000 years ago.

The yellow metal has always been highly valued for its unique properties. The oldest hoard dates back to 4,600 BC, discovered in a Bulgarian burial site in Varna.

Many countries used gold and silver coins as currency until the last century.

Some of the topmost largest gold reserves today are located in the United States, Germany, the International Monetary Fund, and the Bank of Italy, with almost 2,500 tons.

Gold marked an important low in December 2015 at 1063 dollars. This level has never been reached since then. At the same time, the first bullish phase, completed in 2017, made it possible to formulate a long-term extrapolation (Elliott-Fibonacci theory) which saw a target of 1980/1985. The target in question was not only reached in 2020, i.e., during the pandemic but even temporarily exceeded, allowing a maximum to be reached in 2070.

After the first correction, which took place in 2021 with a minimum of 1650, in February 2022, the photocopy seen in 2020 was repeated due to the Russian invasion of Ukraine. Again, once the maximum of 2070 had been equaled, gold prices fell until they slowly approached the minimum of 1650 without calling it into question.

In light of what we have seen since 2020, we can safely say that gold has been moving for over two years, within a lateral context, well between 2070 (important double top) and 1650. This last level corresponded exactly to the 38.20% rise that began in December 2015. Therefore, the correction from the highs respected a very important point according to the Elliott-Fibonacci theory.

By applying Gann’s theory to both the long cycle (bullish since 2015) and the medium cycle (sideways since 2020), we can extrapolate the presence of important set-ups. In technical analysis, the set-ups are time levels with a high probability of a “reset” of the trend.

Well: between July 25th and August 15th, we witnessed the presence of two very close set-ups, on which we currently record the formation of a minimum period. This would suggest that the lateral movement that began in 2020 is close to ending to give way to a new phase.

How Much Is Gold Worth In Real Terms?

According to the calculations we made in 2019 based on historical inflation dynamics, since it was quoted in dollars, gold expressed a real theoretical value of 1430. Today, adjusting this price to the Consumer Price Index dynamics over the past three years, the real theoretical value of gold stands at 1650, which coincidentally corresponds to the low side of the sideways movement of the last two years.

The market is valuing gold correctly and is careful not to sell it below this threshold when a sharp devaluation of the currency’s purchasing power (inflation) is impending. At the same time, there is less and less certainty regarding the economic scenario that awaits us from here to the next two or three years.

In the past, gold has shown that it fluctuates around the real value within a percentage range of +10 and -10, with maximum peaks of +30 and -30 in truly exceptional cases, which, due to the nature of the term itself, returned very quickly. Therefore, if we apply the historical average range, the current range is between 1485 and 1815.

Just in the vicinity of 1815, the maximums of the 200-day average were seen, which began a downward slope from July. In reality, the maximum of the average in 200 days was 1847, confirming how gold prices in the last two years have shown an overvaluation above the historical average.

But What Will Be The Real Value Of Gold In Ten Years?

Answering this question is challenging, but we still need to make sensible calculations based on a rather reliable parameter, namely the average expected 10-year inflation rate.

Through this parameter, we can extrapolate a real theoretical value of gold at ten years of around 2130. Therefore the range between the minimum and maximum at ten years should be indicated in 2340/1915.

Returning to the technical analysis, we can observe how the quotations are moving below the 200-day average, which today moves to 1838, representing the most important resistance. At the same time, the scenario of both short and long-term averages certifies the presence of a decidedly weak picture strengthened by indicators moving in bearish territory.

Another element to be considered is the comparative strength with the SP500 index.

Since gold is priced in dollars, the performance of ETCs and ETFs depends on the following:

• the price movement of the underlying;

• Euro/Dollar exchange.

Hedged ETFs and ETCs are also listed on BorsaItaliana, i.e., hedged against exchange rate risk. When the US dollar appreciates against the Euro, you gain. Conversely, if the Euro appreciates against the Dollar, the yield decreases.

Finally, it is possible to invest in shares of companies involved in mining yellow metal.

In this case, the risks are greater since two variables come into play: inherent volatility and business factors. We refer to the following:

• the solidity of the company;

• the geographic spread of mining projects;

• the company’s costs, margins, profitability, balance sheet strength, and debt;

• management quality etc.

Even though 2023 has been an extremely difficult year for both the equity and bond markets, gold has worse comparative strength to date. Indeed, after holding up better until June 2022, the picture of this indicator seems to have reversed the scenario, threatening clouds on the horizon.

This should make us think about the need to rush to buy gold now.

The adverse factor that is present today must simply be sought in the excessively high level of interest rates, especially in the short term.

According to expected average inflation, buying gold could generate a negative real interest rate. This would be practically even more likely if the investment time horizon were 12 months.

Therefore, in the current situation, it is important to choose the right time to buy gold to minimize the risks.

In fact, in the event of a restrictive monetary policy and declining inflation, gold could begin to express an undervaluation, thus also questioning the stability of 1650, which, in our opinion, remains a valid area to accumulate positions.

Moreover, even if, hypothetically, today, gold offers slightly negative real interest rates, it still protects us from a sudden change of scenario, such as an acceleration of inflation or a financial crisis, for example.

The market these days is pricing gold correctly, in the sense that we are not in the presence of excessive or undervaluations. The neutral weight within a portfolio should be around 3%. For a long-term investor, this is sufficient to consider purchase interventions with a view to prudent diversification.

However, particularly high rates, especially in the short term, could push operators to create undervaluations in terms of price in the coming months. This is a good reason at the moment to stay within the neutrality threshold, i.e., 3%.

Any Increases Should Be Considered In Two Specific Cases:

1. Reaching area 1520/1500 In this case, an undervaluation would be created capable of abundantly repaying the investor in the long term.

2. Breaking of 1850. This signal would only come in the event of variables such as a new acceleration in inflation or an economic-financial upheaval capable of destabilizing the picture.

To invest in gold, we favorably see ETFs that own physical gold (Physical Gold ETFs, to give an example).

Far riskier instead to invest in gold mines, i.e., companies that extract gold. These, in fact, in addition to presenting uncertainties in terms of extraction capacity, are negatively affected by the rise in energy materials, heavily used during their activity. In practice, we are witnessing a sharp decrease in margins, placing them in a highly vulnerable situation.

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