While the dollar is being dumped in the short-term presumably on expectations of a happy end to trade negotiations, and the yen is sinking after warnings from the head of the Bank of Japan, Kuroda, gold seems to be taking the opportunity to swiftly update medium-term peaks. Yesterday, yellow metal went up by $14 to $1,341 per troy ounce, and since November last year yielded almost 12% capital gains for lucky gold buyers. The recent rally helped gold to reach its highest level in 10 months.
What, however, is embarrassing in the rise in price of gold, is the intervention of new growth factors and the rather muted action of traditional ones, such as the safe haven status. For the most part of 2018, gold had a negative correlation with risky assets, for example, with the S&P 500 index, that is, the outflow from high-risk stocks was accompanied by an inflow into the zero-yield asset, i.e. gold. However, at the end of December, the correlation changed sign, which concurred with the beginning of the Fed’s U-turn, which basically opened the door for a decline in the opportunity costs of investing in gold. That is, the signal of a broad-based decline in real yields in the US economy has somewhat boosted appeal of gold relative to other assets, which expected yields began to raise doubts. What is curious is that last year gold enjoyed the status of a defensive asset even more than the dollar, the yen and the US Treasury bonds:
It is possible that gold has become a choice in the “broad-based rally”: since December, not only the S&P 500 has grown, but also the commodity market, including WTI, which has rebounded from the lower limit of the range of $40–45 and is now trading above the $55 mark. Other base metals staged even more impressive rally: take, for example, Palladium, which grew by almost 50% from August last year, overtaking gold in value in nominal terms and even reached a historical record amid slowing growth in supply and increased demand as an effective catalyst in automobile engines.
However, the most curious fact which nobody can’t deny as a rally factor was the activity of central banks in the gold market. While we are focusing on the hourly updates of trade talks and Trump’s Twitter account, the world’s central banks are “on the sly” ramp up of gold purchases:
The volume of purchases in 2018 grew by 74% in annual terms marking the highest level since the collapse of the Bretton Woods system. Seems that some countries hedged their national currencies from sanctions and their associated decline against the dollar. And what do you think about it?
It is also possible that in the short term, gold is on the sights of trend-following algos, whose activity is enhancing each other and creates the effect of “self- sustained rally” the yellow metal. The immediate resistance of gold can be at around $ 1366, where unsuccessful attempts to break up in mid-2016 and early 2018 took place:
However, arguing in the context of the global trend, will the world central banks be able to buy the precious metal further without provoking sharp moves in the price?
Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.