Marius Paun | London, UK | Senior dealer | Tuesday, 19th May 2020
By and large, gold prices have consolidated within a range from $1670 – $1740 since mid-April. That was until last Friday, when it rallied, seemingly without much resistance, despite the disappointing US retail sales for April (-16.4% versus expectations for -12%). In addition, the precious metal reached a fresh seven-year high yesterday at $1765.14 and the outlook is bullish once again.
What’s also worth mentioning is that the gold price has reached new all-time highs in pound sterling yesterday at 1458.37. That is over 22% higher than the record of September 2011 at £1194.5 (post-credit crisis) a level that was breached as early as August last year. Ten months have passed and we’re yet to see a fresh all-time record of gold prices in US dollars which shows that exchange rates can play an important role. If anything, a strong US dollar following the coronavirus outbreak was a major headwind for the precious metal.
Yet it is the inflation topic that keeps investors busy. Almost everyone seems to agree that inflation will return with a vengeance. In theory, all that large scale monetary and fiscal stimulus at unprecedented levels, deglobalisation (businesses relocating back to the mother country, less immigration) potential higher costs of business (think only social distancing for travel and leisure industry) all are considered inflationary. Gold as a hedge against the fear of inflation is one of its core tenets and probably will remain a topic of strong debate for the foreseeable future.
Recently the price of gold has outpaced many other assets and that would seem a tad strange. Because for all those talks about inflation sparked by money printing, this scenario does not appear to be the case in the immediate future. The stimulus has been defended as a way to offer much-needed liquidity and offset deflation instead. But the world still has the risk of a second wave of Covid-19 which could be another blow to financial markets. Trust in a functional economy takes time to re-establish and gold has almost no counterparty risk, risk the other side cannot or would not keep its financial promises (if you discard Executive Order 6102 by US President in 1933).
The prospect of negative interest rates is another feature making gold attractive. In that scenario, investors would pay the bank or commercial banks would pay the central banks to deposit their funds. Gold pays no interest rates but does not impose any charges either. Rates have already gone negative in Japan as well as many countries in Europe. Central bankers in the US and the UK have expressed their dislike but President Trump has been calling for them in the US for quite a while. The official position is that negative rates would encourage borrowers to take even more debt, already at insane levels…. Mind that reverse psychology game!
World Gold Council has published its April report saying that worldwide, gold-backed ETFs added 170 tonnes, net inflows of over $9 billion or 5.1%. That has increased holdings to an all-time high of 3,355 tones. These gold-backed ETFs are becoming even important because they account for a significant part of the gold market, part of the institutional investors’ strategies. Most of the ETFs monitored by the WGC is fully backed by physical gold. Regarding long-term trends, WGC also indicated that ‘assets in global gold-back ETFs grew in 11 of the past 12 months adding 80% to total assets under management. UK-based gold funds now amount to 47% of Europe’s total and 21% of global assets’.
The short, medium and long-term trends are all pointing higher again.
The price sits comfortably above the 6 and 21 moving averages and both indicators point upwards. The short-term MA is well above the longer-term MA. Since early 2015 the chart indicates a string of higher highs and higher lows with the uptrend steepening since 2018.
On the downside, the first target is resistance turned support at $1670-$1690 handle. If sellers manage to push gold below that, support at $1620 will be next. It acted as both good support and resistance from 2011 to 2013 so is a level closely watched. Next look for 61.8% Fibonacci retracement at $1585.
On the way up, the trend needs to be confirmed by a close above yesterdays’ high at $1765.14. The bulls, who now appear to be in control, 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 $1919, all-time record high reached on September 2011. This last threshold has the potential to be crossed rather quickly.