Here we go, Ladies and Gentleman! Gold hit $1,500! Is the round number of $1,600 in cards now? In today's article, we'll keep focus just on the fundamental domain and speculate on the current alignment of these factors - looking merely at them will warm the heart of many a gold bull.
Boring Times in Gold Market Ended
Do you remember those boring last years when nothing much was happening in the gold market? Since 2014, gold remained in a narrow sideways trading range of $1,100 - $1,350 and since 2017, in an even narrower one of $1,200 - $1,350. As the chart below shows, this is over.
Chart 1: Gold prices (London P.M. Fix, in $) from January 2014 to August 2019.
The inversion of the yield curve and the more dovish stance adopted by the ECB and the Fed sent gold in June above $1,400. We commented on this event in the Gold News Monitor as follows:
It's a huge development, as gold got out of a five-year trading range, despite the relative strength of the US dollar. For the past few years, the yellow metal could not unleash itself from the sideways trend and rally above $1,350. Now, it's above $1,400, which creates hopes for further rally.
In the recent Gold Market Overview, we wrote
Of course, only time will tell whether gold's great move above $1,400 will be sustainable or whether the bears will catch it in their claws and put it again in the sideways trend (...) From the fundamental point of view, there are fundamental reasons to believe that gold is able to defend its recent gains and run away from bears towards bulls.
We were right. Actually, we didn't have to wait long for long to exceed the next round level, as the yellow metal hit $1,500 yesterday. Now, the crucial question is what's next for gold?
What's Next for Gold?
On the one hand, fundamentals are still bullish, or are actually becoming even more so. The US dollar index remains strong, but it is not appreciating. Real interest rates and bond yields are plunging. The yield curve has inverted further. The Fed cut the federal funds rate in July, and a few other central banks, including Reserve Bank of India and Reserve Bank of New Zealand, followed suit. And the trade wars resumed last week, or actually transformed into currency wars. Recessionary fears increased and the expectations of further monetary easing strengthened. All these macroeconomic factors should provide support for gold prices.
On the other hand, the recent rally looks a bit parabolic. The price of gold surged $200 or about 15 percent in just two months. Thus, a correction of recent gains is possible, especially that the White House softened its trade rhetoric, while the expectations of further Fed cuts may be slightly exaggerated. The U.S. unemployment rate remains low, while the GDP growth solid, so the state of the domestic economy does not justify further cuts, at least not now.
However, the Fed can be under pressure of the White House and the Wall Street to deliver more accommodation. Yesterday, Chicago Fed President Charles Evans suggested that more easing could be reasonable. And one shouldn't underestimate the power of fear. Investors started to be really worried that the world is heading for another financial crisis. After all, when the Fed started to cut interest rates in 2007, it did not prevent the Great Recession. When investors fear recession - rightly or wrongly - gold's train becomes harder to stop.
It's true that the safe-haven demand for gold is often short-lived. Gold's journey will not be linear, we will see, as always, ups and downs. However, the fundamentals are blessing a path higher. Weren't it for the strong dollar, gold could perhaps gain even more. The bottom line is that after a correction (or a profound decline that could still take place based on multiple technical signs), it's not unreasonable to expect well-bid gold prices - of course, unless we see a trade deal or the hawkish turn among the central banks.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
Thank you.
Arkadiusz Sieron
Sunshine Profits' Gold News Monitor and Gold Market Overview Editor
