• Joel

Gold surges, new all time highs in sight?

Gold surges, new all-time highs in sight?

The gold bulls are well and truly in control – The precious metal has seen a stunning run to the upside over the past few days. This week, it has rallied from around $1810 to over $1870. To the upside, there is very little by way of notable levels of resistance ahead of the psychological $1900 level and then the all-time high at $1921 (set back in September 2011).

Why does gold keep raging to the upside?

The key factor driving gold price action over the past few months has been USD – the precious metal has a inverse correlation with USD, so typically when you see USD strengthen, gold doesn’t like it, and when you see USD weaken, gold rallies.

Sure, its safe haven properties have helped – we are after all in the midst of one of the worst global economic slowdowns in the past century as a result of the Covid-19 pandemic and the effect of resultant lockdowns.

But if you remember back to mid-March, the height of the Covid-19 financial market meltdown and subsequent “sell everything and buy USD” market mentality, gold was actually hit hard. Only when the global USD shortage was eased by aggressive Federal Reserve liquidity operations were investors brave enough to start buying things again (risk asset and safe haven assets!).

Since then, the primary driven of gold price action has been USD. And since then, USD has been smashed. Why?

1) As noted, aggressive pumping of liquidity and monetary easing by the US Federal Reserve has been a huge contributory factor. USD is still seeing downside due to the Fed, as they signal further stimulus ahead given the worsening of the Covid-19 outbreak in the US.

2) That brings us on to the next big USD negative that has hurt USD over the past few weeks: the fact that the Covid-19 outbreak is worse in the US than other developed markets, hurting the US economy’s standing relative to its developed market counterparts.

3) Huge risk on flows since mid-March due to easing of lockdowns, the subsequent faster than expected economic recovery, the aggressive fiscal response of developed market government, as well as aggressive easing from other major central banks.

In that sense, gold has actually acted more like a risk asset as of late than a safe haven. As long as USD continues to the downside, gold will remain supported and, as many analysts/banks are forecasting, has a decent shot at reaching all-time highs very soon. 



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