A Breakout In Gold Is Expected Soon

The gold price rose by 39% from the low in 2018 to its peak this month, as it jumped on the news that the US had assassinated an Iranian general. The subsequent retreat in the gold price shows that individual events do not usually move the price for long. However, a number of factors have combined to encourage safe-haven purchases of gold. Increasing political and economic uncertainty, more monetary easing from the Federal Reserve, falling bond yields and huge quantities of negative yielding debt have all played a part.

This week too we saw gold being influenced by an array of events. Gold prices rose to their highest in more than a week on Monday, after a missile attack in Yemen over the weekend strengthened geopolitical concerns and boosted the metal’s safe-haven appeal, while buying ahead of the Chinese New Year also lent support.

Spot gold was up 0.3% at $1,560.89 per ounce during Mondays trading sessions, after touching its highest since Jan. 10 at $1,562.51 earlier in the session.

The market is also going up because of central bank buying, geopolitical risks such as Yemen missile attack - all these factors are supporting gold.

And since Gold is considered a safe investment in times of political and economic uncertainty, an encouraged buying of the yellow metal was witnessed.

Geopolitical tensions around the world have risen and further eroded the fundamental outlook which is already burdened with unusually-high uncertainty. Investors may therefore be particularly sensitive to comments from officials that have implications for monetary policy.

After the US and Iran stepped back from further confrontation, the gold price has given back some of the gains made following the US missile strike that killed an Iranian general. A more time-consuming correction is possible before gold attempts to reach new high.

We all know that a number of factors combined have resulted in safe haven purchases for the yellow metal; similarly, a number of factors will be the reason behind a rally in gold prices that is expected to happen soon.

TRADE TENSIONS- EU-US trade tensions may soon begin to escalate following a warning from the EU’s new trade chief Phil Hogan that the EU intends on retaliating with tariffs over WTO dispute with Boeing. Relations between Washington and Brussels have been put on the backburner, though it may become the new trade war of 2020. A revived cross-Atlantic trade tiff would further undermine global growth and may push gold prices higher.

COMPANY GAINS- A number of major corporations will be releasing their earnings this week, including giants such as Netflix and IBM. Despite equity markets reaching record-breaking highs, earnings reports are expected to be relatively flat. The worst-than-expected prints could make investors turn to the Fed in hopes that the poor data will make them more inclined to further ease credit conditions. Gold may rise on this far-reaching hope.

INDUSTRIAL DATA -A flow of PMI data from the US, France, Germany, Euro zone, UK and Australia will also be published this week which may reinforce slowdown fears and inflate easing bets. Gold prices may subsequently rise alongside demand for anti-fiat hedges. Given the fundamental risks laying ahead in 2020, the tepid stabilization in PMI may be less of a turning point and more a moment of calm before the prior trend resumes.

FED AND INFLATION- one of the US Federal Reserve’s two major goals is to maintain the inflation rate near 2%.  Because, you know, high inflation is bad. If the inflation rate went up to 4, 5, or 6%, suddenly a lot of people would find themselves in the poor house.  Basically inflation destroys savings because the purchasing power of the dollar you saved years ago is now greatly diminished.

History shows that gold prices rise to keep pace with inflation over time.  So if we move into a period of higher inflation, we can expect gold to go up.

Now, Gold traders will have to observe critical ranges for a breakout. If gold crosses $1563- $1565 then it will break out for big. So be tight, observe gold to take best advantage of the current situation and similarly in the local markets too it is expected cross Rs.40300 per 10g, whenever the breakout is witnessed.

Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.

Commodities AS A Whole Had A Mostly Positive 2019

Gold, meanwhile, had its best year since 2010, climbing as much as 18.31 percent. The yellow metal’s role as an exceptional store of value shined brightly in the second half of the year when the pool of negative-yielding debt around the world began to skyrocket, eventually topping out at around $17 trillion in August. On the news last week that Iran launched a counterstroke against U.S.-occupied military bases in Iraq, the safe haven briefly broke above $1,600 an ounce for the first time since April 2013.

In the past two decades, gold has helped investors limit market volatility and portfolio losses. Between 2000 and 2019, the precious metal’s average annual price was down in only four years. Put another way, gold was up on average in four out of every five years—a remarkable track record.

Last week gold prices surged to seven-year highs after Iran launched a missile strike near U.S. troops in Iraq. Since then, prices have retreated, settling around $1,550 an ounce level as upbeat risk sentiment not the market working against the precious metal.

Gold prices continued to slip on Tuesday with overall global risk appetite still on the up as the markets eye an interim trade deal between China and the United States due to be signed in Washington on Wednesday.

The US has also dropped its designation of China as currency manipulator, which has lightened the mood still further, with markets sensing that there’s some chance of broadly improved relations between the world’s two largest economies.

Gold rallied nearly 4% in December, mainly in the second half of the month, and recently moved to an intraday high of US$1,613/oz as the US-Iran confrontation unfolded. We believe there are a few likely reasons for the move:

• A technical breakout

• Bullish positioning in derivatives markets

• Light trading volumes

• Portfolio rebalancing at the end of 2019 especially as investors hedged risk asset allocations-

• Federal Reserve (Fed) repo activity

Berenberg Cited several “volatile situations in the global geopolitical space” behind its higher forecast, notably ongoing US-China trade negotiations, the potential outcome of Brexit, rising tensions between the US and Iran and the US elections in November.

“It feels that there should be some form of resolution between the US and China over trade in the coming months, and further clarity on Brexit over the same time period; an easing of tensions is likely to weigh somewhat on gold…However, in the background, there remain elevated tensions between the US and the Middle East, and the escalation of tensions between the US and Iran (which have eased somewhat over the last two days) remains an upside risk for gold”, the bank said.

They added that the victory of a “hard left president” in the US elections such as Bernie Sanders or Elizabeth Warren is “likely” to result in stronger gold prices on the potential for radical changes to US government policy.

Meanwhile, Berenberg’s analysts also said it was likely the Federal Reserve will leave US interest rates unchanged until 2021, which they viewed as “supportive for gold” as the metal tends to suffer when interest rates rise.

They added that a pickup in US inflation could potentially provide scope for further interest rate cuts, which could push gold prices upwards.

Rebalancing ahead of 2020

We saw a pullback in investor demand for gold in November, as demonstrated by outflows in gold-backed ETFs and a reduction in COMEX net longs. This reversed in December, with net longs moving back near all-time highs and gold-backed ETF holdings reaching all-time highs.

Anecdotal evidence suggests that investors may be inclined to maintain exposure to risk-on assets such as stocks, but not without hedging their portfolios in preparation for potential pullbacks – especially given the high level of geopolitical and geo-economic risks that have been carried over from 2019 And data suggests that gold may be a recipient of some of this activity.

Fed repo activity

The Fed began reducing their balance sheet in 2018, but reversed this decision in the second half of 2019 In particular, they began regular repurchase (repo) market injections totalling nearly US$500bn in the fourth quarter. This activity has continued into 2020 and has been described by some market participants simply as another form of quantitative easing (QE) – often dubbed “QE light” – and causing some investors to worry about liquidity in the Treasury market as a whole. And, historically, expansions of QE have led to increases in the gold price.

Increased geopolitical risk-

Tensions in the Middle East, driven by the US-Iran confrontation, supported safe-haven flows, pushing the gold price to a six-year high. While a more conciliatory tone by President Trump has recently eased concerns and pushed the price down to the US$1,550/oz level, gold remains up by approx. 2.4% as of 9 January 2020.

Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.