(Zeyan Wen)
Analysts at Goldman Sachs predicted in March that Gold could reach $1800 per ounce, up $150 from $1650. The “currency of last resort” appreciated by 9.1% in the last 3 months, outperforming the S&P500. Meanwhile Gold ETFs received an inflow of $7.7bn in March and a record-breaking inflow of $9.2bn in April, demonstrating the strength of Gold in an environment of uncertainty and fear.
“Gold gets dug out of the ground. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head” – Warren Buffett
Our Alien overlords would certainly be “scratching their heads” in confusion as we homo-sapiens scrambled to get our hands on some form of shiny metal. Indeed, to “bury it again and pay people to stand around guarding it.” Since the Neolithic times this metal with no apparent utility other than in making jewelry has been viewed as a safe-haven asset and in this year’s COVID-19 crisis, Gold once again prevailed.
At the beginning of the virus outbreak in the US, Gold prices dropped sharply to a low of $1477.30 per ounce as firms and investors sold their positions in Gold to cover heavy losses from other assets, however a V shape recovery soon followed due to enormous demand and the characteristic limited supply of gold.
The Bank of England stores $405bn worth of 400-ounce gold bars rather than the 100-ounce Gold bars used in the Comex exchange in New York, therefore it must be refined by Swiss gold refineries which operate at significantly reduced capacities due to social distancing measures. Furthermore, the travel restrictions globally have greatly decreased the number of passenger airlines that are normally used to transport refined gold to New York where it is used in Comex to settle futures contracts or sold to retail investors causing the cost of transporting Gold to rocket as much as eight-folds. The fall in supply combined with the increased transport costs pushed the price of Gold futures on the Comex exchange in New York rose to $70 above that of London just a few days after the low on the 18th March, driving the V shaped rebound in Gold prices.
The aggressive COVID-19 stimulus packages installed by the FED and other central banks to boost the economy further contributed to the rise in Gold prices. Trillions of dollars of government spending being injected into the global economy led to the drastic increase in money supply with Bank of Japan releasing a fiscal stimulus equivalent to 21.1% of Japan’s GDP which generates inflationary pressure. According to Investopedia “Gold is widely viewed as an inflation hedge – a reliable measure of protection against purchasing power risk.”. Therefore, a rise in inflationary pressure leads to a rise in demand for Gold as an alternative to keeping cash, which loses its purchasing power overtime.
At the end of May this week, global sentiment on equities (stocks) recovered on the grounds that most economies are easing lockdown measures and that economic activity and industrial production are slowly returning to pre-COVID-19 levels as equity markets continue to rally to their highest level since early March. As investors regain confidence in equities, Gold completes its role as a safe-haven asset throughout the crisis. However, it is still unclear whether Gold will begin to fall due to new fears about US-China tensions, especially with regard to potential economic punitive measures by the US government in response to Beijing pushing forward the National Security Bill in Hong Kong.
Technical Analysis:
Recommended short-term trade: short
time frame: 4hours
Gold has presented an uptrend in the last few weeks as indicated by trendlines marked in green but price broke lower trendline before reaching a support level.
Price rose to within reach of the major resistance level (all time high) and it is unlikely to rise further due to the strength of the resistance.
14 Moving Average crossed below 21 moving average, presenting a potential short trade once price breaks out below the support. However, caution is advised as RSI at 25 shows that Gold is currently oversold which demonstrates strong selling sentiment but a reversal of RSI back above 30 could signal a pullback against the short trade.
Definitions:
- S&P500 – an index that seeks to represent the US equities market by tracking the stock prices of the largest 500 public companies listed on US stock exchanges.
- ETFs – Exchange Traded Funds, investment funds traded publicly in stock exchanges. Gold ETFs refer to a type of commodity ETF that only consists of Gold. Note that Gold ETFs hold derivatives contracts backed by Gold therefore the price of the fund will be linked to that of physical Gold while not directly owning it when investing.
- A safe-haven asset is one that holds its value during times of market turbulence. Gold is considered as a safe-haven asset due to its scarcity (unlike money governments cannot simply produce more Gold), its consistent record of outproducing other assets during turbulences,
- Comex: the primary futures and options market for trading metals such as gold, silver, copper, and aluminum. Formerly known as the Commodity Exchange Inc., COMEX merged with the New York Mercantile Exchange (NYMEX) in 1994 and became the division responsible for metals trading. – Investopedia
- Futures: a contract that binds buyers and sellers to agree to transacting at a specific price at a specific point in time in order to minimize risk.
Independent market research for the future investor. 