You can thank central banks if it does!
Earlier I wrote an update on the stock markets, after a
sizable rally for European markets as investors started the week with a bullish mood. But now my attention is turning to other markets that, since March, have had strong positive or negative correlations with equity prices, as I wonder whether they will now follow suit and break out like equities. One of them is one of my favourite assets: gold.
The yellow precious metal has actually been going up and down with the stock markets for several years now. It has done so mainly because of the fact bond yields have been going lower, forcing yield-seeking investors away from debt and into racier equity markets as well as non-interest-bearing precious metals and other assets. Yields have fallen because central banks have pumped even more liquidity into the markets by buying bonds and other assets. And they will do more, if needed as the pandemic continues to cause economic slowdown across many regions in the world. That is what the European Central Bank’s President Christine Lagarde said today, echoing similar commentary from other global central bank heads.
Against this fundamental backdrop, I am struggling to find reasons why investors should be selling gold. Admittedly, gold has already reached – and surpassed – my long-term target of $2000, but I still feel we haven’t seen the top just yet. Indeed, I am looking for technical signs of a bottom to emerge around current levels, as I don’t think we will see a massive correction.
With that in mind, a lot will now depend on whether there is acceptance below the low that was formed in August at $1863, or whether the dip-buyers will prevent prices from falling further:
Source: ThinkMarkets and TradingView.com
In other words, there is a possibility we could see the formation of a
false break reversal pattern here, but right now I am only speculating as we haven’t seen any confirmation yet.
- So far, there has been tentative signs that the buyers are trying to come back, with gold rising back above this level at the time of writing today. With plenty of support levels already broken, confidence among some investors have undoubtedly been taken a hit. So, the hesitation is totally understandable. But if we now start to see the breakdown of some resistance levels again, then confidence will likely grow again, potentially leading to an upsurge in prices.
- But as I mentioned, all depends on whether there is acceptance or rejection below the August low. If see acceptance, and price holds below $1863 for a couple of days, then I would expect gold to then drop to at least $1800, possibly lower, before its attempts another recovery stage.
So, those are the scenarios I am monitoring at the moment. I clearly favour the bullish rather than the bearish scenario because of the above fundamental reasons. But it is always important to be prepared for whatever the market throughs at you. I could be correct in the long-term direction of prices, but in the short-term the path to reaching another potential record high could be bumpy to say the least.
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