2019-11-11 • Updated
The fundamentals for gold
Like many other financial assets, gold is very sensitive to US interest rates. If you hold the precious metal, you don’t have income in the form of interest. As a result, when American central bank increases rates, gold becomes much less attractive for investors and its price falls. The opposite is true for when US rates stay unchanged or decline.
The next update of the US rates will take place on Wednesday. The USD stays near 19-month highs ahead of the event.
At the same time, factors that create risk aversion (the global economic growth slowdown, US-China trade wars, and Brexit uncertainty) are positive both for the USD and for gold as both of them are used as safe havens.
As a result, if the Federal Reserve signals a pause in the hiking cycle, gold can be one of the assets showing the biggest gains because traders will be able to simultaneously bet on the weaker greenback and still pour their money into a refuge asset.
Actually, given the overall troublesome background, only a very hawkish message from the Fed (forecasts of multiple rate increases next year) is able to derail gold’s recovery. At the same time, such scenario doesn’t seem very likely given the recent disappointments in the American economic data releases.
The yellow metal depreciated in the first half of 2018 because of the strong USD but then started correcting up since the middle of August. XAU/USD managed to rise above the 200-week MA. This means that there’s a real chance that a bottom was found. If it stays above 1230, it will retest the previous support line at 1270. The next big target will be at 1300.
The longer-term picture
To get even higher in 2019, gold will need a weaker USD and real yields in the United States and the faltering stock market. All of these are probable. If there are problems with the top major currency, the precious would shine as an alternative for investors. The bullish scenario may take gold up to 1500 next year.
Notice, however, that during the recent years, the overall appeal of gold declined. Investors are cautious in accumulating this asset. For example, the world’s biggest gold exchange-traded fund SPDR Gold Shares reported that its holdings for the year have declined by 73.94 tonnes. This trend means that the medium- and the long-term advance of gold probably won’t be quick.
If things in the global economy and politics don’t improve much but don’t escalate either, gold will trade in the range between 1300 and 1200. If there’s a positive solution of Brexit and trade wars, the gold price may test 1100.
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