The gold price has surged to a near nine-year high this week and shows potential for further gains thanks to the unique macroeconomic environment that continues to drive investment in precious metals.
Gold has gained more than 22 per cent since the start of the year, rising by 6.8 per cent since the beginning of summer alone. Unprecedented government and central bank stimulus to mitigate the impact of the Covid-19 pandemic on economic activity has driven investors to increase their holdings of gold, first as a safe haven and then as a hedge against inflation.
This gold analysis provides an overview of the recent rally and looks at what may come next for the market.
Covid-19 creates a perfect storm for investors to take refuge in gold
The gold price trend has been bullish since it bounced up from the late-March sell-off in financial assets. Having fallen to the $1,477 per ounce level, spot gold quickly climbed to $1,769 per ounce in April, as concerns about the effect of lockdowns around the world on economic activity and share prices prompted investors to rush into safe-haven assets.
The market consolidated until early June as some of the risk returned to equities, but investor interest in the metal has shifted to hedging against inflation, as analysts at ABN Amro note, “the world is taken over by government and central bank stimulus measures.“
The sharp rally has put spot gold at all-time highs against several currencies and approaching the record high against the US dollar at $1,920.70 per ounce. Gold chart analysis shows the market rose to an intraday high of $1,874.50 per ounce on 22 July, its highest level since September 2011 and a gain of 5 per cent since the start of the month. That was in line with technical indicators pointing to a bullish setup with a close above $1,765 per ounce leading to a breach of the key psychological level at $1,800 per ounce.
The rally accelerated after the US government ordered the closure of the Chinese consulate in Houston, a sign of further escalating tensions between the two countries. That came after the European Union agreed on a €750bn recovery fund to provide a stimulus for European economies, which is likely to push real interest rates lower. And an increase in Covid-19 cases, particularly in the US, raised the prospect of continued lockdown restrictions.
The unique confluence of economic and political events has allowed gold to rally even as equities markets have moved higher, with the metal trading inverse to recent US dollar weakness. The US Congress is debating a new round of stimulus as its relief package is set to expire and the Federal Reserve has indicated it expects interest rates to remain near zero until 2022, limiting the upside for the dollar.
Gold price analysis: will the precious metal keep rallying?
The strong rally has investors wondering whether it’s now too late to enter the trade or if gold is poised to climb to new record highs. For months, analysts have been pointing to the effects of the fiscal stimulus on real interest rates as positive for the gold price forecast.
Dutch bank ABN Amro notes that gold price technical analysis shows the technical outlook is positive. “Now the psychological resistance of USD 1,800 per ounce has been surpassed. It seems that investors will only be satisfied if the former peak in gold prices at USD 1,921 per ounce is reached and taken out. Above that the important psychological level of USD 2,000 per ounce is within reach,” analysts at the bank said.
They caution that there could be a near-term pullback on the way to fresh highs. “We still expect a sizeable correction in gold prices in a risk-off environment when the dollar is back in favour. It is likely that this correction will be short-lived and be a buy-on-dips for investors eagerly waiting to step in. After such a correction prices could rally again. … Our forecasts don’t reflect the near-term dip in prices we still expect, because this sell-off will be short-lived.”
But ultimately, “aggressive monetary policy easing, ultra-low interest rates, negative US real yields, fiscal stimulus and the technical outlook all support gold prices…” the analysts added. “Our new gold price forecast for end 2020 is USD 1,900 per ounce (was USD 1,700 per ounce). Our new gold price forecast for end 2021 is USD 2,000 per ounce (was USD 1,800 per ounce).”
UK research consultancy Capital Economics has similarly raised its target in its latest gold price forecast this week, noting that even if some of the steam comes out of the rally next year, the economic backdrop will limit any downside. “We have raised our forecast for the gold price, as we expect real yields to drift a little lower and remain low for some time,” said analyst James O’Rourke. “We now think that the price of gold will finish the year at $1,900 per ounce ($1,600 previously) and will remain elevated over the next couple of years.”
Citibank (C) has upgraded its gold price forecast for the third quarter to match its recently-updated price target of $1,825 per ounce for the next three months, in turn lifting its base case average estimate for 2020 to $1,740 per ounce. The bank’s analysts continue to expect gold to reach $2,000 per ounce in the first half of 2021.
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Canadian investment bank TD Securities also remains bullish in its gold price prediction, maintaining its view that the metal will continue trending toward $2,000 per ounce into late 2021. “We expect that macro-themes, namely higher inflation expectations, will continue to support gold prices, at a time when rates volatility remains particularly low,” analysts at the bank said. “We have argued that gold is in the midst of a regime change, shifting from a safe-haven into an inflation-hedge asset. As a result, gold prices have increasingly been correlated to risk assets. This is driven by common drivers impacting both risk assets and gold — namely, the surge in liquidity that has driven both risk assets and gold higher.”
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