What’s Next for Gold? 3 Important Tail Winds

These pre-coronavirus concerns have only been exacerbated further by the onset of the pandemic this year, as well as the economic consequences of the virus itself and the differing responses to it across the globe.

Recently, we’ve seen gold break through the two solid resistance levels of $1750 and $1790, respectively. $1750 is a level that goes all the way back to 2012 and $1790 halted gold’s upward path in both 2011 and 2012. After gold futures broke above $1800 earlier in the month, the spot market followed suit, sending the precious metal to highs last seen 9 years ago. So what’s likely to be next for gold? Are we getting toppy at these levels or do we have further to run?

ETFs

Gold ETFs remain one of the best ways for risk-averse investors such as insurance companies and pension funds to allocate their capital to this safe-haven asset. With interest rates coming down to the zero bound in developed countries and bond yields dropping, gold ETF allocations have been on the rise. Last month it was reported that, in May, gold-backed ETFs registered inflows of gold totalling 33.7 billion in dollars, the largest since the last all-time high of $24 billion in 2016. And that’s only 5 months into the current year.

Some of the reasons given for this surge of interest include all the usual suspects of ballooning central bank balance sheets, economic uncertainty, trade tensions and continued concerns over COVID-19. However, gold’s steady uptrend during both rising stock markets and rising bond markets is revealing an interest in the yellow metal in both risk-on and risk-off environments. Keep in mind that as more capital flows into these gold-backed ETFs, their gold holdings also necessarily increase, causing them to have to buy more gold at higher prices.

Production Disruptions

You would expect an unprecedented lockdown like the one we recently experienced to cause a massive drag on demand across the board. Gold jewellery has been no exception. Its sale has been down throughout the pandemic in countries like China and India, which have traditionally been large retail markets. However, this has more than been made up for by safe-haven capital inflows from the developing world.

Many gold miners now find themselves watching demand increasing while their operations experience significant disruptions due to the pandemic. Last month it was estimated by Wood Mackenzie that in order to maintain 2019 production levels, the gold industry would have to invest $37 billion into roughly 44 new projects by 2025. With virus hotspots having recently moved from Europe to the developing world, countries like Brazil, Chile and Peru have to contend with soaring infection rates and measures that are impeding the running of their existing mines, as demand for the precious metal increases.

Unresolved Risks

Have the risks that led to gold’s recent rise been resolved in any way? This is a key question. Part of golds recent performance has to be put down to perceived monetary risks. Fear of central banks printing large amounts of new money and debasing their national currencies, as well as fear surrounding the idea of “lower for longer” where interest rates are concerned. Have these specific fears been put to bed? The answer would have to be a decisive no.

How about the perceived fiscal risks of government debt, deficit-spending and the like? We’re now just over half a year into this coronavirus pandemic and are still hitting daily records for new infections. A significant portion of the global workforce finds itself out of work, and there are increasing fears of corporate bankruptcies on the horizon. All of which is likely to take a toll on government balance sheets as they are forced to step in and provide economic buffers for their populations.

What about the geopolitical risks? Have these lessened in 2020, or have they increased and become even more unpredictable? We’ve recently seen skirmishes between India and China along a border shared by the two countries as well as a complex of trade tensions between China and a number of nations including the United States, Australia and India. Add to this the local problems each nation is facing and you have to believe that geopolitical risks have increased in 2020, making the world of 2019 look like a far simpler one. All of the above suggests that rather than easing, the fears that have led to gold’s rise, as well as the uncertainty for the future, have only strengthened.

Final Thoughts

While the US stock market continues to confound the bears and a race takes place between market euphoria and growing coronavirus cases, gold’s price has been going from strength to strength. From a technical perspective, traders are undoubtedly looking at +$1800 gold prices for signs that gold is overbought. However, it would seem that only three resistance levels now remain before a blue sky breakout. These levels are $1850, $1881 and $1919, all three of which were tested within a period of 5 weeks back in 2011.

So, what ways are there to play a market that has already gone up some 15% in this year alone?

Last month, Goldman Sachs increased its 3-, 6-, and 12-month forecasts on gold. It upped them from $1600, $1650, and $1800 to $1800, $1900 and $2000 respectively. Also recently, famed bitcoin evangelist and cryptocurrency hedge fund manager, Mike Novogratz, advised people to own more gold than bitcoin, saying: “My sense is that bitcoin outperforms it, but I would tell people to have less bitcoin than they do gold just because of the volatility.”

For those not wishing to trade this market, it would appear that the consensus is that gold has to rise from here, regardless of how much it has already risen since 2018. A buy and hold strategy may make sense for this group. For those wishing to actively trade gold, keep a close eye on any break above the former all-time high. When assets break to new highs they can run much higher than many expect as there is no previous price action to go on. For those of you who are more conservative, look for a re-test of $1800 on the way down to hold as support.

by Giles Coghlan, Chief Currency Analyst at HYCM

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