Has Gold’s Trend come to an End or only Beginning?
The year 2020 for Gold and the world’s safe havens was without-doubt like no other with the asset seeing lows of $1,449 in March 2020 and figures as high as $2,075 in only a few months later. The figure of $2,075 is significant to the market as this is the highest price the market has ever placed Gold and is also double the price over a period of 5 years. With Gold being part of the complex trading market, we have put together the latest developments and elements which traders can take into consideration while trading.
At the moment, the world’s major stock markets are renewing all-time highs. Investors are redirecting capital to growing indices and stocks in the hope of making money. We can see over the last few months the risk appetite of the market has slightly changed, but lately traders have been questioning whether certain indices and stocks are overpriced.
Historically, indices are not an absolute indicator of the state of the economy as they do not necessarily represent the market or economy as a whole, this still applies today. Also it should be noted that falling issuers are excluded, and growing companies are added, which makes it difficult to analyze the timing of the trend change in the index. Though, over the years the market has accepted there is a correlation to some extent.
If we compare the dynamics of the movement of the Dow Jones and Gold, an inverse correlation is noticeable. Since the beginning of last August, the index has gained 19%, while gold quotes have fallen by 14% over the period. Thus, the redirection of capital from precious metals is visible. Therefore, there is a high probability that when the course changes, there will be a reverse flow from the index, but this is merely based on the past price movement and the correlation theory.
Now, several signals are indicating a trend change, which are long-term low interest rates, poor global demand for the products of manufacturing companies, and steadily rising inflation. Thus, soon, stock indices are expected to enter a deep correction according to certain analysts such as Claws and Horns. Traditionally, investors wanting to protect their profits will start transferring capital into shelter assets such as Gold, which will naturally lead to an increase in the price of the metal.
Another correlation which can potentially endanger the bulls in the market is the inverse correlation with the US Dollar. The correlation rule is simple, if the USD goes up, Gold goes down and vice-versa. Even though the correlation is known to be strong it should be noted this is not always the case. There have been times, especially due to a change in risk appetite, in other geographical regions where demand in both assets increases at the same time.
When looking at the price of the US Dollar over the past three days we can see the index decreased from 91.55 to 90.51. When looking at the price movement over the past three days we can clearly see that the price has increased from $1,791 to $1,834. So, here we can clearly see the correlation and the risk which an appreciating USD can have on the price of the asset.
Other than the underlying fundamental factors, the likelihood of rapid growth is supported by the technical picture. When we look at the weekly time frame chart over the past year, we can see the price action is close to forming the well known Flag Price Pattern. The price moves within a stable upward 5-wave trend. Therefore, potentially, we may have the fifth wave of the trend begin to form according to the theory, which will be a logical implementation of the Flag pattern. Though, it should be noted that this is one theory and it is important for traders to take into consideration volatility and other potential price movements.
The last factor which can potentially drive prices in Gold is COVID and more so, the COVID-19 vaccine. As a rule of thumb the more strain which COVID takes and negative news regarding the vaccine, the more chances there are of investor’s risk profile changing. For example, further lockdowns or reports of ineffectiveness of the vaccine, or even in some cases deaths can have an affect on the volatility. At the same time, positive reports regarding the above will also affect the price action
Overall, we can see there are different elements which affect the prices of Gold and there are numerous correlations which traders can take into consideration alongside their analysis of trends and the price movement in general. Both Gold and trading is known to be complex and therefore, it is also important that traders not only analyse the asset and the market, but also to trade responsibly with the appropriate level of exposure and leverage