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.
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