Gold bulls are in charge again

Marius Paun | London, UK | Senior dealer | Wednesday, 19th February 2020

On Wednesday, gold prices are on course to test the 7 year high of $1611.27, last reached on 8th of January 2020. The rally in the precious metal is happening despite an increase in the value of the US dollar to a new multi-year record. Historically, the two (gold and the greenback) are inversely correlated, as by and large commodities are expressed in the US dollar. Nonetheless in the recent weeks that negative correlation has broken down, mainly due to the coronavirus outbreak and in turn demand for safe-haven assets has now become the trump card. Hence the renewed strength for gold prices.

Recently, a string of established companies and NGO’s fuelled pessimism over the potential of a deepening economic slump, resulting from the coronavirus. First the US giant tech company Apple warned that it will miss sales target. The International Monetary Fund Managing Director Kristalina Georgieva also weighed in saying the epidemic ‘could have a significant impact on the world economy and that IMF could cut global growth outlook’. Since China has become the manufacturing hub of the world, concerns are now rising about the spillover effect.

On the face of it, the outbreak was the catalyst pushing gold prices higher in the last few weeks but it might have been the final piece of the puzzle. The stars had already been aligning for the precious metal since mid-last year.

As we mentioned before, gold is also linked to interest rate and inflation. The precious metal benefits from falling interest rates and usually its price goes south when rates are rising. Right now, interest rates have been dropping since December 2018 and given the upcoming US election this year, they are probably likely to be kept on hold or even fall slightly further (although the Fed doesn’t favour negative rates).

On the other hand, the US Federal Reserve has a 2% inflation target. If the rate goes below 2% the Fed should loosen its monetary policy and conversely if it goes above, it should tighten. During the recent years, the US inflation was sitting constantly well below 2% so the Fed is now considering plans to allow it to move a bit above the target before intervening. Is it an excuse to keep interest rates low? Regardless of the logic behind this, such action should be supportive of gold prices.

Another sticky point in the current climate favouring gold is global debt to GDP ratio being at record highs. In particular, the Fed balance sheet has grown from $800 billion, around the 2008 financial crisis, to $4.5 trillion ten years later. Last year the Fed reversed course and restarted its easy monetary policy so many now wonder how high the balance sheet will go this time. ‘Buy some gold as a hedge’ is the closing suggestion of nearly every article touching on the subject.

So it is easy to see why the so-called ‘gold bugs’ are absolutely rejoicing as a result of the perfect storm approaching gold. Interestingly Ross Norman, the leading gold price forecaster at the London Bullion Market Association, highlighted last August, that in the last two decades, Gold has already hit all-time highs when priced in pound sterling, Australian dollar, Canadian dollar and Indian Rupee.

Even more encouragingly for Gold, Ross sees central banks around the world buying at the fastest pace in history. As per usual he also makes a prediction for 2020 in terms of the gold price range, a high of $2080 (so thumbs up for reaching an all-time high in US dollars as well) and a low at $1520.

The long, medium and short term trend are all pointing higher.

The current price sits comfortably above the 9 and 21 moving averages and both indicators point upwards. The 9 MA is well above the 21 MA. After making a double top formation in July 2016 and early 2018, gold has once more moved higher. Since early 2015 the chart indicates a string of higher highs and higher lows. Is there anything to reverse the current trend? Even more, the trend has accentuated during the past 15 months or so.

On the downside, the first target is around $1550 mark which held as good resistance in August-September last year on the way up. It also acted as good support from 2011 to 2013 before eventually giving way so it’s a level closely watched. If the gold price moves below that, it will signal the presence of sellers. Support at $1520 will come under questioning.

On the way up, the trend needs to be confirmed by a close above the recent high at $1611.27. The bulls will look at $1625 – $1632 range, last seen in February 2013, as their next hurdle, followed by $1680 area. For now, buyers are in control.