- May 19, 2020
- Posted by: Amit Pabari
- Category: Commodities
It is rightly said that “Borrowers will default, markets will collapse, but gold will skyrocket.” The latest momentum in gold proves the quote right. In the follow up to our previous report on gold, the price action and fundaments suggest that the yellow metal is on its mark to set new highs.
- Global Central Bank Interest stance: Central banks across the globe have or are on the verge of adopting zero to negative interest rates to support the sagging economy. Investors began pricing in negative US interest rates for early 2021, for the first time ever, despite FOMC members have repeatedly said that negative rates are not appropriate. Yet, Powell suggested that the recent Fed’s measures are not the final chapter and the central bank has pledged to do whatever it takes to maintain the economy afloat throughout the on-going crisis. As the recovery will be slower than expected, while the uncertainty will be elevated, the Fed could continue to remain dovish. All this means that the fundamentals of the gold market, which were bullish even before the pandemic, have become even more bullish now.
- Fiscal Stimulus: Global economies are continuing to deliver a robust fiscal response to tackle the coronavirus outbreak. Nations across the world have come up with various tax incentives, loan guarantees, and wage subsidies in order to shield their citizens as well as their businesses from the devastating effects of the pandemic. Increasing the money supply by dramatic amounts in an economy where output is constrained by law is likely to be inflationary. At times like this, stimulus’ cannot increase real output in an economy as the problem now is on both, demand and supply side. People tend to remain conservative in their investment decisions, as at such times the flow of money doesn’t move towards riskier assets class like equities, commodities, high-yield bonds, real estate, and currencies.
- Higher risk aversion: The lack of a swift rebound in the economic activity implies that the recession could be longer, while the recovery slower. That is great news for gold, which shines the most during economic crises. The stronger is the economic calamity, the higher are the chances of second-rounds of repercussions for the financial system. In a post-pandemic world, risk aversion could be larger than before the epidemic, which should be positive for safe-haven assets such as gold.
- Aftermath of corona crises: There are significant downside risks for the economy, which if materialized could push gold prices even further up. In particular, many investors underestimate the possibility of further repercussions, hoping for a quick rebound. In 2008 too, economists believed then that the problems would be limited to the subprime mortgage market and wouldn’t affect the whole economy. But it did shake the whole economy. However, even if the quick recovery happens, dovish central banks, high debt and the low-interest rates will stay with us, which would support the gold prices. Thus fundamentally, the coronavirus crisis is positive for the gold.
The bullish reversal in Gold prices (XAU/USD) accelerated last week after bottoming out at $ 1690 levels. The actual bullish breakout materialized after it broke a classic wedge cum symmetrical triangle pattern. The bulls rallied to hit fresh seven-year high at $ 1765 levels. The same was triggered especially after central banks extend their bond-buying schemes and speculation about the negative rate in the US elevated.
As seen from the above chart, gold has broken a wedge cum symmetrical triangle pattern on the daily chart in the last week. XAU/USD is currently trading above all major Daily Exponential Moving Averages. A breakout in the above pattern suggests that the price will make its move towards $1805 levels in the first place and a breakout above it will pave way for the previous all-time high of $ 1910 levels. However, a pullback below $ 1690 shall void the uptrend in the near future.
Summing up the above technical and fundamentals, it hints a clear indication to a sustained rally in the gold.
In $ per ounce: Buy for T1: $ 1810 ; T2: $ 1910 and final $ 1950 (Stop Loss: $1705)
In Rupee per 10 grams: Buy for T1: Rs. 53000; T2: Rs. 56000 and final Rs. 58000 (Stoploss: 46000)
-Amit Pabari is managing director of CR Forex Advisors. The views expressed are personal.