The Kobeissi Letter: Gold Is Heading To $1,400 And Here's Why

Gold prices closed the week up 1.2% at 1,268/oz and broke through the strong technical level we had been watching at $1,265. Gold continued its rise last week after receiving rhetoric from a more dovish than expected Fed meeting, an increase in market volatility, and a declining U.S. dollar.

On July 26, we saw the Fed leave interest rates unchanged and assert their concerns about inflation not being up to par. This caused a further drop in the U.S. Dollar Currency Index to levels around 93.

More importantly, we saw the USD/JPY ratio fall below 111 after it went through technical failure at 114.25. The USD/JPY ratio has been one of the major driving factors for gold as this ratio and spot gold are inversely related in the short term.

The markets also saw an uptick in volatility midway through last week which increased investor appetite for safe haven trades like gold and bonds. We expect market volatility to continue to increase and add to the demand for gold.

Looking forward, gold must break above technical resistance at $1,283 before the next major move higher. Beyond there, we look to break above the $1,300-$1,310 level and this is what we believe will happen. The Kobeissi Letter’s gold target is $1,400 by the end of 2017.

We now look for the Dollar Index to break below the 93 level for a drop to 89. We also expect the USD/JPY ratio to continue lower and approach the 104 target that we set last week.

Another metric that we like to watch is the commitment of traders report that comes out every Friday afternoon. We saw long positions in gold rise 30,700 from 60,100 to 90,800 last week. This was very bullish as a 50% rise in long contracts proves that large fundamental buying has entered the commodity and we expect that to continue.

We would also like to point out that the Market Vectors Gold Miners ETF GDX is set for a large run higher along with physical gold itself. Last week, GDX broke above a downtrend, beginning in April, at $22.70. The ETF also held support at $22.15 which was another major bullish factor.

We are now calling for the GDX ETF to make an 8.4% move higher to $25. Both gold miners and the commodity itself are in the midst a massive run higher and we maintain our long positions here at The Kobeissi Letter.

Farewell and Trade Well!

The Kobeissi Letter is a stock market newsletter sent out every Monday morning, providing analysis on equities, crude oil, gold, treasuries and currencies. We also provide five trade recommendations at the end of each week's letter, including an options market trade, for our subscribers to consider. In addition, our Chart of the Week showcases technical analysis and a trade recommendation. Subscribe to receive our analysis and recommendations.