Gold price reached a year-to-date high of $1,768 on May 18. Since then, its performance has straggled behind the overall market. In the past month alone, the price has declined by about 0.6% while the S&P500 and Nasdaq 100 have gained by more than 8%. The US dollar index has declined by more than 3.97% in this period.
Why gold has lagged behind the market
In May, many countries like Australia, New Zealand and Germany started to reopen their economies as the number of coronavirus cases dropped. In the United States, most states also started to unwind their stay-at-home orders.
At the same time, there was optimism about a coronavirus vaccine or therapy as hundreds of companies announced their progress. Among the leading companies developing the drugs are AstraZeneca, Gilead Sciences and Moderna, among others.
Meanwhile, global central banks committed themselves to ultralow interest rates and more asset purchases. More recently, the European Central Bank (ECB) added to its planned asset purchases by another €600 billion in a bid to stabilise the eurozone. The Fed is still in an open-ended quantitative easing program while the Bank of England is expected to boost its QE in the upcoming meeting.
Additionally, countries are still announcing unprecedented stimulus packages. Recently, the European Commission launched an $826 billion recovery fund. In the United States, Trump has called for an additional $1 trillion package while Japan has also added more money to its stimulus.
As a result of all this, investors have rushed to stocks and exited risky assets like gold and to some extent, Bitcoin. This is because owning gold is not as attractive as stocks as the metal does not pay any dividends.
Demand for gold has also been declining in India, its second-biggest market. According to Bloomberg, gold imports by India declined by 99% for a second straight month in May. The country shipped about 1.3 tons from 105.8 tons in 2019. The decline in May came after the country shipped just 60 kilograms in April. That was the worst decline in at least a decade. Analysts expect the demand from India to remain low as the country goes through its worst economic slowdown in decades.
Gold is often viewed as a safe haven asset, which means that its price tends to do well when global risks are rising. Looking ahead, several events could incentivise investors to move back to gold.
First, North Korea announced that it was ending communication with the south. This was significant news as it shows relations between the two countries in the peninsula has deteriorated. Analysts believe that the reason for the escalation is that North Korea feels it is not getting any returns by talking to the south and the United States. For one, the crippling sanctions remain at a time when the country is facing its worst recession in decades.
Secondly, the United States and China are at loggerheads again. The new tensions started when the US president started blaming China for hiding details of the virus when it had detected it. Trump statements may be trying to deflect blame as the number of American casualties continued to increase. China rejected the accusation and highlighted the measures it took to alert the world about the virus.
The tensions increased two weeks ago when China bypassed Hong Kong’s basic law and implemented its security laws. This move caught the US off-guard and the US is assessing ways to retaliate against the country. These tensions are likely to continue in the coming weeks.
Thirdly, in an unprecedented move, the US announced that it was withdrawing about 9,000 troops from Germany. While the move seems benign, analysts believe that it could lead to more tensions between the European Union and the US. It could also increase tensions between the EU and Russia.
Finally, the biggest risk is of a second wave of the coronavirus pandemic in the United States. Analysts expect the number of cases to spike in the coming week because of the protests that have been going on. Most of these protests are happening in cities with high coronavirus cases like New York and Los Angeles. Also, the protests have had thousands of people participate and a good number of the protesters were not wearing masks.
The risk of a new trade war between the US and China and increasing infections mean that the Federal Reserve will be in a tight spot. In the upcoming meeting, the bank is expected to leave rates unchanged and continue with the quantitative easing program. And according to the Wall Street Journal, the bank is considering treasury yield control. With this, the bank sets a target yield for US treasuries and intervenes to ensure that the yield remains the same.
If the risks increase, there is a possibility that the bank will turn to negative interest rates as some officials have suggested. These risks mean that the price of gold could be headed higher in the near term. In a recent note, Scott Minerd, the respected CIO at Guggenheim Partners wrote:
“With the Fed going all-in on financing the government deficit, the US dollar could be at risk to negative speculation of its status as the dominant global reserve currency. Investing in gold may help offset this trend.”
Gold technical outlook
The longer-term gold chart shows that the price reached a high of $1,926 in September 2011. The price then declined and reached a low of $1053 in 2015. This price was along the 50% Fibonacci retracement level. Since then, gold has been attempting to regain its all-time high. While doing this, it has formed a pattern similar to the cup and handle. This means that the price may continue moving upwards as bulls attempt to retest the all-time high of $1926.