Market Overview

Gold prices have made another attempt to rise, reaching a new high of the year just a little below $1,780 per troy ounce (toz) on Wednesday. But the American trading session was rather confusing for the yellow metal as it brought prices back to the level of $1760/toz, which is almost $5/toz below the peak of May 18.

Thus, a contradictory technical picture was formed, when gold prices finished to draw a bearish pin bar candlestick as a result of yesterday's trading. Testing of the former resistance zone turned out to be too deep and long lasting, creating reasonable doubts that the resistance zone was strong enough to become a support now. It might be that the resistance zone has just widened upwards and is still active, constraining the prices within prescribed limits.

But at the same time, the highest daily closing of the year took place again, and it happened for the third trading session in a row. Before this week, for 2020, gold had never before closed any day above $1747.20/toz. The current descent is still located in a higher range than almost all of this Monday's price consolidation, and prices are still much higher than last week's trading range.

Such a complicated situation on both daily and hourly charts is caused by the fundamentals. Some of them are very favourable for the further step-by-step bullish move in the long run. A few short-term factors act on the bearish side. Specifically, in the last couple of trading sessions, the U.S. Dollar index rose slightly, fuelled by a downward correction movement on stock markets. Again, this correction is associated with new peaks of infection in several U.S. States, as face masks become mandatory in Washington state, while the governors of New York, New Jersey and Connecticut even announced that visitors from other states with high coronavirus infection rates must self-quarantine for 14 days upon arrival.

Both corrections on stock indexes and shares, and some synchronous strengthening of the U.S. Dollar as a "safe haven" currency may be temporary since very few people believe in a new American lockdown, and, therefore, the possible economic damage from new cases of infection is likely to be limited. However, gold is perceived now not so much as another "safe haven" asset, but rather as an important hedging addition to stock portfolios. Therefore, gold gets more fuel to rise when stocks actively grow and loses some of the essential support just at the moments of such corrections.

So, the downside correction of stocks is most probably the main but fleeting reason why gold has relaxed its grip, when it had a real technical chance to consolidate a success. Any noticeable strengthening of a particular reserve currency, and especially if it is the U.S. Dollar, automatically generates some decrease in demand for gold since more financial capital tends to flow into the currency and into the governmental bonds.

In the long-run the picture could be totally different. Major central banks continue to print coronacrisis wild money, which is seemingly critical for fast economic recovery after a hard hit. However, those new monetary trillions seem to not be supplied with any new material products or with some newly prepared and rendered services. By printing out development dreams for companies and society, such measures devalue the very purpose of money, especially when it is used for savings. Again, interest rates are close to zero worldwide and do not allow investors to get any visible income on deposits or bonds denominated in U.S. Dollars, in Euros, in British Pounds or other reserve currencies.

There are more and more predictions of possible currency depreciation in years to come. “There’s no free lunch in the world. How can we allow this many world central banks turn on the money-printing machine and print unlimited money?” Guo Shuqing, chairman of the Chinese official banking and insurance regulator, told on Shanghai forum about a week ago, urging governments to "think thrice" before rolling out fresh stimulus measures.

He also warned that pumping the U.S. economy with Dollars has only served to create a record growth of stock markets, which completely lost their connection with reality, as the scale of distortion is unprecedented. Guo Shuqing said the Dollar-denominated global monetary system had played a role in stabilising the global economy, but massive domestic stimulus in the United States risks denting sovereign debt and Dollar credibility. High inflation and devaluation may come. “There are a price to pay for blank cheques,” Mr Guo Shuqing summarised.

It could be a mistake to forget that this was said by one of the top officials in the country and that China’s buying of U.S. gold and treasuries is used to replenishing reserves with large amounts of physical gold and which, at the same time, holds huge reserves in U.S. Dollars. Such opinions about the possibility of devaluation of the Dollar may directly affect the decision-making of the Chinese financial authorities at some point.

Stephen Roach, a Yale University senior fellow and the former Morgan Stanley Asia chairman, who is also one of the world’s leading authorities on Asia, recently told CNBC’s “Trading Nation”: “The U.S. economy has been afflicted with some significant macro imbalances for a long time, namely a very low domestic savings rate and a chronic current account deficit.” He is concerned that a changing global landscape paired with a massive U.S. budget deficit will spark a Dollar crash and that a crash could spark a late 1970s-type stagflation crisis, when prices rose sharply while economic growth was muted. “The dollar is going to fall very, very sharply,” he added along with a forecast for a 35% US Dollar drop against other major currencies. 

In fact, the single European currency or the Japanese Yen may face a similar problem of future depreciation since the European central bank and the Bank of Japan use the printing press policy quite generously. Even if we assume that the expectations of many experts of a possible future depreciation of reserve currencies are exaggerated, the very fact that such public expectations exist may still further push up the demand for gold assets. The second main fundamental factor could be the growth of stock markets, as soon as it continues at one stage or another, and many investors may continue to hedge their investment portfolios with additional portions of gold again.

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.