Gold fundamentals meets market dynamics, consolidation in play at all-time highs

  • Gold fundamentals underpinning the move, but many obstacles could now come into play.
  • With yields sinking lower, real rates continue to make new lows and the US dollar is not in favour. 

The price of the yellow metal ran up an all-time high at the start of the week, extending what has been a remarkable rally in the months of June and July of around 16.5%

Sinking US yields, mass stimulus and liquidity have been the main contributors to precious metal strength. 

The stars are aligned for gold prices and a test of the psychological level of USD 2,000 is within reach now,

analysts at ABN Amro argue, offering several reasons for this.

  • Firstly, since the start of July the US dollar has declined.
  • Secondly, central bank policy is a strong driver behind higher gold prices.
  • Thirdly, in a number of countries there are negative rates (official and/or government bond rates).
  • Fourthly, the US may not have negative official rates or government bond yields, but nominal rates corrected for inflation expectations (real rates) are in negative territory.
  • Fifthly, governments have embarked on large-scale fiscal stimulus to support the economy. 
  • Finally, the technical outlook is positive.

However, while we are seeing higher stocks and gold at the same time, this may not stay that way, for there are plenty of reasons out there to jolt investors risk appetite, from US elections, trade wars, the coronavirus to name a few.

Not all are bullish best, not for the short term at least

The markets are banking on inflationary pressures. However, there is also some reserved scope and the argument for deflation for which gold does not hedge against.

In a risk-off environment where the US dollar attracts a surge of demand again, the substantial all-time high long positioning in gold could come crashing down in higher volatility once again. 

If the prior price action and correlation to falling stocks and gold prices is a playbook to go by, then Wall Street is where we will see the volatility signs first.

We still expect a sizeable correction in gold prices in a risk-off environment when the dollar is back in favour. It is likely that this correction will be short-lived and be a buy-on-dips for investors eagerly waiting to step in. After such a correction prices could rally again.

 It is likely that gold prices will test USD 2,000 per ounce in the near-term. But we still expect some profit-taking after that,

analysts at ABN Amro said.

A stock market crash could be the canary in the mine for committed gold bulls and portfolio manages who will be first to square gold positions to pay for margin calls elsewhere, pressuring the gold market. 

If then, the inflation hedge is stripped out, gold will be left to pick up the pieces of safe-haven flows eventually once again. 

However, if the stock market can teach us anything about today’s markets, playing devil’s advocate is just not fashionable.

We expect that these common drivers will continue to drive capital to shelter itself from negative real yields in both risk assets and real assets, and therefore, we argue that money managers need not be concerned about trading gold in a risk-on environment,

analysts at TD Securities argued. 

Gold levels

In the above chart, we can see that the 23.6% Fibonacci lines-up with the prior resistance structure on the monthly chart.

A daily analysis also shows this is a key level for which the 78.6% lines-up.

 

 

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