Gold: a safe-haven trade amidst uncertainty

Historically, gold has always been seen as a safe-haven asset that would maintain and even gain value during uncertain times. With markets having seen historic levels of volatility over the last few months, many analysts and investors alike have suggested that gold could be the asset class that out-performs all others this year.

What drives the value of gold?

There are a number of factors that drives the value of gold, such as:

• Traditional supply/demand dynamics
• Real interest rate (inverse relationship)
• The strength of the Dollar (inverse relationship)
• Inflation expectations (Direct relationship)

How are these factors currently playing out?

• Demand for physical gold is at a record high with a number of physical dealers globally unable to meet the increased demand
• Physical supply in the short-term has decreased with a number of mints and mines slowing production and mining as a result of COVID-related shut downs
• Interest rates globally have been on a downward path for some time, as a result of fiscal support from global central banks. We recently saw the US Federal Reserve cut rates down to almost zero, and it is possible that rates go into negative in the near future
• The USD has been extremely strong over the last few years, but there are some signs that the currency has run out of steam and could see some weakness in the near future
• Inflation expectations are quite mixed at the moment, with many suggesting an impending period of much higher inflation. However a growing number of analysts and market commentators suggest that we could see a period of deflation post COVID-19

Technical View:

Dollar-denominated gold has moved into a sideways consolidation following its recent rally. The consolidation is considered between the 1660 (support) and 1750 (resistance) levels.

Traders of gold might wait for a breakout or trade the current range between levels 1660 and 1750. In lieu of the uptrend, which preceded the consolidation, traders might prefer to keep a long bias to positions on gold i.e. waiting for a break above the 1750 resistance level, or a bullish reversal of the 1660 support level.

In summary:

• There are a number of fundamental factors suggesting that gold could rally in the medium to long-term

• Biggest concern would be the prospect of deflation in the global economy, which would be detrimental to the gold price

• In the short term, traders could use a pull back to the 1650-1660 level as a potential entry into a long trade, or trade a breakout above the 1750 level