Last month’s movements of gold prices are startling. After an impersonal rally this year from $1451 per troy ounce in March, the yellow metal in November lost 10% of its maximum price of $1965 per ounce to $1774, the worst monthly loss for the last four years. Did gold lose its function as a safe haven asset in November amid roaring pandemic and global economic turmoil?
Hardly. Gold maintains its safe haven status. Economic “storms” and jeopardies have eased since this spring, when investors sheltered themselves in gold instruments. On the contrary, investors’ “vessels” have set course to new safer “blue oceans” as some effective vaccines are expected to go public soon. The pandemic is not yet contained and it is still spreading around the globe. But the market trades with future developments in mind, a future where the pandemic could slow down during the coming months. So, investors could bet on expanding business activity pushing up the prices of risky assets of the real economy – shares, crude, currencies of exporting countries. Thus, the demand for safe haven assets, like gold, may rise accordingly.
The undisputed victory of Joe Biden in the presidential elections in the United States restored hopes of relaxed U.S.-China relations, suspension of trade wars, which is undoubtedly positive for the global economy and risky assets. Dovish rhetoric of the Treasury Secretary nominee in Biden’s Administration Janet Yellen, a former Federal Reserve Chair, fuels additional optimism in the markets. Luckily, these factors have united together in November, somewhat muting the demand for safe haven assets.
However, such significant decline in gold prices is questionable and may be unsustainable, just like the rally this year. Prices tend to seek equilibrium after a strong rally and such balance for gold prices may be seen above current price levels for the following reasons. Firstly, the containment of the coronavirus and vaccination may not be as smooth as everybody hopes it would be as there are many hurdles in the mass vaccination process. Secondly, Democrats may insist on the larger relief package and return to the initial pledge of $2 trillion, as opposed to the $908 billion package being discussed now. Meanwhile, Joe Biden may insist on additional funds to support unemployed citizens, businesses and local authorities in the United States, which would require more than currently discussed. Anyway, any additional funds would be likely flow partially into financial markets, and commodity markets too. That was the case during the first wave of the pandemic when the Federal Reserve and other central banks pumped additional liquidity into the market to support stalling economies. That was one of the major reasons why gold prices rallied in March-August 2020. A weakening U.S. Dollar may also push prices up.
These fundamental factors are confirmed by technical analysis as the upward trend that started in August 2018 is still intact. The impact of the pandemic has formed recent highs in gold prices. However, the decline of gold prices since August should not be treated as a standalone trend, but a 50% correction to the existing upward trend. The strong support level at $1774 per troy ounce, which is the maximum of May 2020, strongly correlates with this correction.
To resume, there may be a strong probability that the bottom for correction in gold prices has formed. The above mentioned factors, together with the sense that gold is oversold, may trigger the recovery of gold prices to the resistance area at $1900-1950 per troy ounce.
Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.
Risk Warning: Trading Forex and CFDs on margin carries a high level of risk and may not be suitable for all investors. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.72% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Prior to trading, you should take into consideration your level of experience and financial situation. TeleTrade strives to provide you with all the necessary information and protective measures, but, if the risks seem still unclear to you, please seek independent advice.
© 2011-2022 Teletrade-DJ International Consulting Ltd
Teletrade-DJ International Consulting Ltd is registered as a Cyprus Investment Firm (CIF) under registration number HE272810 and is licensed by the Cyprus Securities and Exchange Commission (CySEC) under license number 158/11.
The company operates in accordance with the Markets in Financial Instruments Directive (MiFID).
The content on this website is for information purposes only. All the services and information provided have been obtained from sources deemed to be reliable. Teletrade-DJ International Consulting Ltd ("TeleTrade") and/or any third-party information providers provide the services and information without warranty of any kind. By using this information and services you agree that under no circumstances shall TeleTrade have any liability to any person or entity for any loss or damage in whole or part caused by reliance on such information and services.
TeleTrade cooperates exclusively with regulated financial institutions for the safekeeping of clients' funds. Please see the entire list of banks and payment service providers entrusted with the handling of clients' funds.
Teletrade-DJ International Consulting Ltd currently provides its services on a cross-border basis, within EEA states (except Belgium) under the MiFID passporting regime, and in selected 3rd countries. TeleTrade does not provide its services to residents or nationals of the USA.