Gold Will Have Its Day Again

Marius Paun | London, UK | Senior dealer | Friday, 16th April 2021

There now appears to be no doubt that gold has been in a bear market since the beginning of 2021. The price has lost 20% from the high of last August when it was trading over $2075, to the lows of early March this year when it touched $1676, dropping in a steady trend. The reasons behind it were rising bonds yields, specifically the benchmark 10-year Treasury note moving above 1%, rising US dollar and even the fact that ‘bitcoin stole gold’s thunder’ as Barron reported. CNBC quoted strategists at JP Morgan agreeing with the switch from gold into the digital asset which is currently enjoying another explosion.

The US President Joe Biden planned to add $2.2 trillion fresh stimuli to support economic growth and jobs creation, mainly addressing the infrastructure badly needing a makeover after years of under-investments. As a result, that is expected to bring pressure on potential higher interest rates (bad for gold). Regardless of the drivers pushing gold south, analysts are trying to gauge when/if the current downtrend will turn, and will occur sooner rather than later.

We recently saw a retest of lows seen on March 8th at $1676. The level held and quickly sparked a rebound to $1750s. Many considered gold below $1700 mark as oversold, but the so-called Great Rotation might have also played a part. It’s when investors sell growth, high tech stocks in favours of cyclicals where miners and especially gold miners play an important part. The explanation from a different angle is that the digital world, where all the innovation and growth took place in the last few years, is now taking a breather. Instead, investors are turning towards value, physical assets (including gold) which have been battered hard lately.

Let’s look at the impact of rising bond yields because it seems it’s a mixed bag. Gold pays no interest but actually comes with storage costs. So, if yields are rising, money that would normally have gone to gold in a world with flat or falling rates will start chasing those bonds. Hence increasing bond yields don’t bode well for the precious metal, at least in the short term. But rising yields are a sign of anticipation of economic strength, which in turn gives rise to inflation.

The newly-printed money has already started to flow into the real economy, as we can see from yesterday better than expected retail sales figures in the US. On top of that, Covid has undoubtedly hurt globalisation where international trade took a tumble. So the West in general stand to benefit less from China’s cheap labour costs for example thus paying higher, local prices. That is likely to bring inflation back at some point and gold is the favourite hedge against the fear of inflation. Hence the long-term, rising yields are actually spurring demand for gold even if we may not be at that point yet.

At the same time, a stronger US dollar is also a short-term bad influence on gold prices. However, in the longer term, things get a bit more complicated. Recently, the greenback enjoyed a pullback, on the US Dollar Index, to above 93 from below 90 at the beginning of the year. From the end of March, it seemed to resume the downtrend, but if the bulls re-take control and push the dollar towards 100, gold investors could get hurt. If inflation rears its head, is very unlikely for gold not to rally. Historically there have been times when gold and the US dollar both went up. So the long-term narratives of increased monetary stimulus, returning inflation and lower for longer rates hardly changed and they all support gold.

In its latest Market Commentary, the World Gold Council said that high rates continue to make headlines and together with a stronger dollar kept gold prices at arms’ length. But a ‘rebound in economic activity is also becoming more visible for consumer and strategic investors alike’. The WGC adds that looking forward, a levelling in interest rates as a result of accommodative global monetary policies combines with rising money supply and inflationary pressures may support investment demand in the precious metal.

The chart shows a downtrend since the record high of August last year at $2075 with lower highs and lower lows. However, the short-term moving averages have just moved above the longer-term ones and both indicators are now pointing upwards. The price is also above both indicators. So short-term trend turned bullish.

On the upside, the resistance around $1765 seems to have given way this morning and momentum could gather speed. Look for $1805 as the next hurdle for the bulls followed by the 38.2 Fibonacci retracements around $1830. On the downside, if the bears re-establish control, will then have to challenge support around the $1740 mark followed by $1717.