Price of Gold Fundamental Weekly Forecast – Illiquidity Likely Behind Gold’s Erratic Price Action

Gold has been difficult to analyze and trade the past few months as virus-stricken financial markets have become vulnerable to unexpected price swings and periods of illiquidity that have skewed normal trading patterns and investor reactions.

Most gold market analysts, traders and brokers have had it drilled into their heads that gold is a safe-haven asset that should be bought during periods of fear and uncertainty in the global marketplace.

When that didn’t work, the same people turned to the direction of Treasury yields, risky assets and the U.S. Dollar for guidance. That worked at times, then it didn’t. The price action suggests that traditional indictors have been thrown out the window.

Although one may think that a falling market means nobody wants to own it because it’s overpriced. In the case of gold, it has proven to be a valuable asset when it comes to providing cash and liquidity during the massive sell-off in the stock market.

So is gold an investment, a safe-haven or a funding commodity? It is probably all three at this time.

The fact that gold is plunging despite Treasury yields hovering near record lows and stocks reaching bear market status should not be a surprise since it started to act funny earlier in the year after the U.S. killed a high-ranking Iranian general and Iran threatened a war against the United States. Gold’s status as a safe-haven asset was even questioned last September when it barely moved following an attack on Saudi Arabia oil fields.

The real question that needs to be answered is, “Are you buying gold for protection, or as a long-term investment?”

If you’ve been buying gold for protection then you’ve been rewarded because you’ve been able to sell it in order to cover losses or meet margin calls in the stock market. In this case, I guess you can say that gold fulfilled its role as a safe-haven.

If you’ve been buying gold as an investment then you’re taking periodic heat as it competes with other investments. In other words, as an investment, buyers come in when it’s relatively cheap and sellers come in when it’s relatively expensive.

Liquidity issues have also contributed to the volatility in gold. With so many major players seeking protection in U.S. Treasurys, liquidity has been sucked out of the gold market. If investors need cash they are turning to the gold market to provide it, while holding on to guaranteed government bonds for protection. This is probably the biggest reason why gold can’t sustain a rally.

As long as cash is scare and money sits in Treasurys, we can expect gold to continue to make erratic and counter-intuitive moves.