Marius Paun | London, UK | Senior dealer | Thursday, 25th June 2020
After a few weeks of going back and forth, gold prices finally broke higher early this week and came within reach of the crucially important $1800.00 level. It has managed this despite a stronger US dollar which in turn was supported by a number of factors. A spike in the number of Covid-19 cases in the United States and Latin America, as well as renewed concerns about rising trade tensions, have fuelled demand for safe-haven currencies yet again. In addition, amid the reopening process, there were many medical scientists in Europe warning of the second wave of coronavirus.
Markets have turned a bit jittery lately, worried that the V-shaped economic recovery could be in jeopardy. The International Monetary Fund weighed in earlier in the week slashing its global output forecast and said there could be more damage from the pandemic than initially expected. The toughening stance of the White House towards various European countries, saying it is considering changing tariff rates for a number of products, did not help the mood in the markets either.
These geopolitical challenges, some old some new, have kept gold prices near the recent records. Although in a normal year, during the summer months, gold usually takes a breather, it seems it would take a lot of courage to short gold now. We seem to be in the beginning of a new monetary world order where the reactions and interventions to the coronavirus are stretching to the max the debt load of many nations. Investing in government bonds is increasingly questioned as a safe option when the chunk of negative yields is now above $10 trillion. And whilst these events have all happened in the recent past, they are fresh in our minds.
Many may point-out that on the short-term, deflation is still the immediate danger, as the recovery is feeding through slowly. And yet investor’s sentiment is about what happens next; can we stay one step ahead of the real economy? If the velocity of money returns nearly as fast as it evaporated during the pandemic, inflation could become a real prospect. Central banks will try to tackle it but with so much extra debt in the world, hiking interest rates would be almost impossible. As such, gold might become a very sought-after investment.
Recently, we saw the US stocks coming close to all-time record high and, in the case of the technology sector, even reaching fresh highs. A simple look at Bloomberg charts comparing gold mining companies with the S&P 500 shows these ratios reached their lowest level in late 2015 and again at the end of 2019. So, there is plenty of potentials still there and it is the reason they have done rather well since the mid-March selloff.
The World Gold Council monthly report tells us that ‘gold ETFs inflows through May (623 tonnes) outpaced records for any calendar year, in only 5 months’. The highest ever annual inflow was previously 591 tonnes of gold in 2009. There were 154 tonnes added last month alone – net inflows of $8.5 billion and global holdings have now reached a new all-time high of 3,510 tonnes.
The Council added that in the past year assets in global gold-backed ETFs have gone up over 90%. UK-based gold funds now amount to 48% of European assets and over 20% of global assets and the trend points to a rising share.
Gold trading was a bit choppy for the past few weeks as markets were trying to find enough momentum to push upwards. It broke to a new 7-years high on Tuesday and again on Wednesday when it reached $1779.35. It has not quite tested the $1800.00 mark yet. The price sits above the 6 and 21 moving averages and both indicators point upwards.
On the downside, the first target is support around $1750.00 handle. If sellers manage to push gold below that, there will plenty more at $1700. It acted as both good support and resistance from 2011 to 2013 so is a level closely watched. On the way up, the trend needs to be confirmed by a close above yesterdays’ high. The bulls will then look to test resistance around psychologically important $1800 mark which held very well during 2011 – 2012. Beyond that there is little resistance to all-time record high reached on September 2011.