Gold price has been on an upward trend in the past few months. Its price has risen by 10% in the past three months and by about 7% in the past month. Trading at $1,810 per ounce, the price is at the highest it has been since 2011 and a few points below its all-time high. Other metals like silver and copper have been in an upward trend
Why gold price has rallied
There are several reasons why the price of gold has rallied after it bottomed at $1,671 in April this year. First, global risks have been rising in recent months. For example, the US has tussled with China over the coronavirus and the controversial Hong Kong security law. Also, tensions between South Korea and North Korea have been rising.
Second, the coronavirus pandemic has led to a sudden decline of the global economy. This has led to large-scale stimulus packages by governments and central banks. In Europe, the ECB has retained negative interest rates and boosted its asset purchases to more than €1 trillion. In the UK, the BOE has left rates at a historic low and is buying assets worth more than £500 billion.
In Japan and the US, the central banks are implementing an open-ended quantitative easing policy. In total, central banks and governments have announced stimulus packages worth more than $11 trillion. Gold gains in these situations because investors believe it is a good hedge against currency debasement. It also gains because these measures have pushed bond yields to historic lows.
Third, demand for gold has been rising as more investors rush to its safety. According to the Wall Street Journal, investors pumped more than $40 billion to gold-backed exchange-traded funds. That amount was higher than the previous annual record reached in 2016. This inflow is likely to continue because of the amount of “dry powder” in the market. According to the FT, investors are sitting on more than $2.44 trillion of cash. Some of that money could end up in gold.
Fourth, gold demand has been rising at a time when supply is falling. Recent data from South Africa showed that gold production dropped sharply in March. Other top producers have slashed production because of the pandemic.
Finally, investors have been enthusiastic about the economy. This is evidenced by the recent rally in stocks and commodities. A report by S&P Global provided a good summary about the situation:
“Gold prices remain well supported, as a perfect storm of weaker dollar, elevated central bank balance sheets, the threat of a second wave, and tensions last night between China and the US took hold.”
Focus remains on central banks
Looking ahead, investors in the gold market will be focusing on central bank decisions. In their most recent decisions, most central banks left their policy responses unchanged because of the upbeat economic data.
Recent data has shown that the world economy improved significantly in June as countries reopened. For example, in the United States, employers created more than 2.5 million jobs in May and 4.8 million in June. Similarly, retail sales and manufacturing and services PMIs have been rising.
Therefore, central banks did not have a lot of incentives to lower rates and expand QE. However, recently, things have changed as the number of new coronavirus cases has been rising. For example, in Australia, the government has closed the border between Victoria and Melbourne. In the United States, health officials are reporting more than 50,000 new cases every day.
The rising cases presents two risks. First, it will interfere with the economic growth that is happening. For one, several states like Florida, Texas, and Arizona, have started rolling back their reopening plans. Also, some retailers have shut down their stores. Therefore, most analysts have started ruling out a V-shaped recovery.
Second, it will affect how central banks respond to the crisis. For example, in the US, the Fed has activated most tools in its toolbox. It has brought rates to historic lows and is implementing an open-ended quantitative easing program. In this program, it is not only buying safe treasury bonds but also risky stocks.
Therefore, the Fed could be forced to implement more actions, including yield curve control and negative interest rates. Such measures, together with the proposed stimulus package by the government, will be positive for gold.
However, the key challenge of this will be the US dollar. In recent weeks, the US dollar has been weakening against key currencies because most investors were pricing-in a V-shaped recovery. The closely-followed dollar index has declined by almost four percent in the past three months. This weakness has also helped push gold price higher. If the number of coronavirus cases continue to rise, demand for the greenback will rise as it did in March. This could bring more pressure to gold price.
Other several factors are playing into gold’s advantages. First, analysts believe that the US election will lead to some tensions, which tend to be positive for gold. Second, the rising number of coronavirus cases in countries like South Africa and Brazil could impact supply. Just this month, a federal court in Brazil ordered the government to remove 20,000 miners from Yanomami Park. Similarly, in South Africa, miners say they are operating below capacity.
Gold price technical outlook
The daily chart shows that gold price has been in an upward trend for years. The price is trading above the 50-day and 100-day exponential moving averages while the RSI has just crossed the overbought level. Also, the signal and main lines of the MACD have been rising. Still, the price is not yet extremely overbought, which means that it is likely to continue rising as bulls target the next resistance at $1,900.