Pressure grows on gold amid Bitcoin upsurge

Speculators are evidently abandoning the precious metal in favour of racier assets...

The short-term outlook for gold is becoming increasingly grim, even if prices haven’t collapsed yet. Gold has struggled each time a new breakout attempt has been ever since peaking at $2075 back in August. But while the short-term outlook looks bleak, the longer-term outlook hasn’t changed much in my view.

In recent times, gold buyers have been evidently abandoning the precious metal in favour of other, riskier, assets:

  • Bitcoin, for example, has been surging higher over the past few days as it continues to become increasingly popular as an alternative to fait currencies. Some even regard it as a better store of value than gold because, unlike the precious metal, the supply of the digital currency is fixed and running short as more and more investors get their hands on it.
  • What’s more, with the recent vaccine developments, we are hopefully heading to more normal times ahead and so appetite for haven assets have fallen, as too have expectations for further monetary easing in 2021. Investors are therefore warming towards value stocks instead.
  • Underscoring the reduction in appetite for fold, the world’s largest gold-backed ETF – SPDR Gold Trust – saw further outflows yesterday to the tune of 7.3 tonnes following an outflow of just over 9 tonnes the day before.
While the short-term outlook is becoming increasingly negative, the long-term outlook remains bullish. Gold will likely remain supported in the long term as physical purchases increase over time with a rebounding world economy, especially in places such as China and India where jewellery demand could pick up the most. While further interest rate cuts are becoming increasingly unlikely – as rates are already very low and there is the potential for the world economy to slowly recovery and for inflation to pick up – monetary policy is unlikely to be tightened too quickly in any case. This will prevent bond yields from rising rapidly, keeping noninterest-bearing assets like gold and silver supported.

With that said, and judging by recent price action, the pressure is growing for at least a short-term breakdown below key support in the range between $1848 and $1863. If that happens, the floodgates could open, leading to a potential drop to the next key support area between $1800 to $1818:

gold vs. bitcoinSource: ThinkMarkets and
However, if gold manages to hold its own here or forms a false break reversal then the short-term bearish outlook would become invalidated.

In any case, a rise back above $1895 resistance would be a short-term bullish development. Longer-term, gold will need to break above the falling wedge pattern it has been stuck inside since the summer to turn decidedly bullish again.