Gold- A Sprinter in the Marathon, Is the Price Rally Sustainable?

  • Aug 02, 2020 AEST
  • Team Kalkine
Gold- A Sprinter in the Marathon, Is the Price Rally Sustainable?

Summary

  • Gold spot has been sprinting whilst in a marathon with gold spot establishing bullish indication from the onset of the year 2015 and spiking in the recent past to reach a record high.
  • Gold’s relevance as a hedge has surfaced in the recent past more promptly, especially in the wake of bloating Fed’s balance sheet and plunging U.S. dollar.
  • The increased relevance of gold as a hedge is clearly evident from a recent spike in the investment in physical gold, mainly through global gold-backed ETFs and by central banks.
  • The recent surge in gold has come at a rabbit-pace, and combined with weak consumer demand, could lead to high volatility in gold over the near-term.
  • However, considering the paradigm shift the COVID-19 outbreak has brought along, it would not be wrong to say that the newly brewing asset allocation strategies of the investing community could lead to strong fundamentals ahead.
  • Gold on charts

Gold spot has been in a marathon with a generally positive trend for the past few years; however, the onset of the year 2020, saw the outbreak of COVID-19 pandemic across the globe. In this context gold’s relevance as a hedge has come to fore even more, especially in the wake of bloating Fed’s balance sheet and plunging U.S. dollar.

The increased relevance of gold as a hedge is clearly evident from a recent spike in the investment in physical gold, mainly through global gold-backed ETFs and by central banks.

  • As per the recent data from the World Gold Council (or WGC), the investment in gold during the June 2020 quarter almost doubled to reach 582.9 tonnes, and about ~ 72.75 per cent was from the global gold-backed ETFs.
  • The investment from gold-backed ETFs surged over threefold during the June 2020 quarter to stand at 3,621 tonnes.

The high demand for gold from the global gold-backed ETFs further resonated into high price performance with gold spot surging 17 per cent in value during the first half of the year 2020, moving up by an additional 10 per cent in June 2020 alone.

The recent surge in gold has come at a rabbit-pace, which combined with weak consumer demand, could lead to high volatility in gold over the near-term; however, considering the paradigm shift the COVID-19 outbreak has brought along, it would not be wrong to say that the new asset allocation strategies of the investing community could lead to strong demand keeping gold afloat, if not propel further.

Record High Rally

The gold spot reached a record high of USD 1,981.22 per ounce on 28 July 2020 to break its previous seven-year high, rather quickly and expectedly, leaving the market with the question, if the price rally is sustainable?

Well, so far in 2020, gold has been a stallion with returns almost bypassing every major asset class, primarily due to three main reasons, which would take some time to change.

  • High uncertainty
  • Very low interest rate
  • Positive price momentum

First and foremost, the COVID-19 pandemic looks far from over, and more importantly, it has brought a structural change in the estimation of the global economic recovery, which now seems to be morphing into a W-shaped recovery.

To Know More, Do Read: Gold Hits life highs: Eight ASX-listed Gold Stocks Under Sentiment Splash

  • Furthermore, while some countries like China, South Korea, Germany, and other European countries have started to turn a corner, many have started giving up on early hopes of fast recovery, and moreover, the market seems to be embracing for a bumpy ride and a long road to recovery.

Secondly, central banks across the globe have drastically trimmed interest rate while improving massive rescue packages, which is now fuelling to a belief that the recovery across the equity front, seen during the June 2020 quarter is prompted by extra money being pumped into the system rather than fundamental improvement, which might result in very high inflation or, at the very least, currency debasements.

Additionally, such possibilities are taking strong roots across the globe and providing an impetus for the ever-improving fundamentals of gold.

To Know More, Do Read: Gold Vaults to Highest Levels Since October 2012; Trade Trends and Data Divergence

While both fundamentals and market sentiments seem to be fuelling gold and increasing chances of a  better prospect for the commodity, gold is showing some positive developments on charts as well; however, some technical indicators are depicting a different picture, which is worth monitoring in the short-term.

Gold on Charts

Gold Spot Daily Chart (Guppy Moving Averages) (Source: Refinitiv Eikon Thomson Reuters)

  • On the daily chart, it could be seen that the pair of short-term exponential moving averages have spent a greater number of period above the pair of long-term moving averages, reflecting on the fact that the gold prices were rooted for a rally from the onset of 2015.
  • Furthermore, in the recent past, the distance between the pair of short-term exponential moving averages and the pair of long-term moving averages increased over bulls participation, leading to a rally in gold spot prices.

Gold Spot Daily Chart (Guppy Moving Averages) (Source: Refinitiv Eikon Thomson Reuters)

  • On further following the recent rally closely, it could be seen that the distance between the pair of short-term exponential moving averages and the pair of long-term moving averages are further enlarging, which coupled with the indication from directional signals, are confirming that bullish sentiments currently dominate the gold market.
  • The plus Directional Index (or DI) is trading above the minus DI with a large gap, which could further seed bullish sentiments ahead.
  • Also, the plus and minus DIs are showing a positive signal since the onset of 2015 with a small overlap of plus DI and minus DI in between, reflecting on gold’s behaviour of taking a short-term price correction, between a large rally.

Gold Spot Daily Chart (Bollinger Band) (Source: Refinitiv Eikon Thomson Reuters)

  • On further following the daily chart with different technical indicators, it could be seen that the gold spot has now attempted a volatility breakout with prices breaching the +2 Standard Deviation (or SD) of the 20-day simple Bollinger band.
  • However, the prices could not sustain the breakout, leading to a price correction, which could be further explained with the help of 14-day Relative Strength Index.
  • Historically, the 14-day RSI has climbed to a maximum value slightly above 77.15, from where the 14-day RSI usually retraces, to a peak low or say prices usually correct itself from the overbought zone to retract to the mean value.
  • In the status quo, the 14-day RSI is suggesting that the gold spot could take a short-term correction.
  • Moreover, the Average True Range is showing a divergence with the prices contouring new highs while ATR lagging in doing so.
  • The volatility in gold, as reflected by ATR, has considerably remained low in the recent past over clear domination of bulls in the market.

 


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