Thursday, July 23, 2020

Asia Times: Can gold rise to a new record high?

Tags
  • Dollar
  • Gold
  • XAU

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Analysts’ Pick: Can gold rise to a new record high?

  • Gold may suffer a minor pullback in the short-term following its recent surge as investors take profits.
  • However, a potentially overheated stock market and weak outlook for the greenback suggests that the precious metal is more likely to make new highs as it crosses 1900.20.
  • Gold’s stability also looks likely to continue be more attractive as opposed to the dollar in the long-term, and possibly the higher-risk Nasdaq 100 index in the short-term.

Gold has experienced a surge since the start of recovery phase of the global economy as multiple countries reopen from lockdowns to curb the spread of the Covid-19 pandemic. The precious metal has gained as much as 27% since March 19th, and is currently trading close to its all-time high of 1900.20 in 2011. While its gains is still less than that for the same period for the S&P500 (+46.42%), it may be a good fit in longer-term portfolios to hedge against the dollar.

Gold’s has experienced a more stable performance compared to equity through the year, despite underperforming the S&P500 from March 19th

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In the medium-term, gold may be able to benefit from a possible fade in optimism as good news comes to an end, and weak corporate earnings set into investors' sentiment. Stock prices has shown a surge over past months since lockdowns has eased. But fundamentals suggest that there is little to support the surge in asset prices. Corporate earnings have slumped along with forward guidance while a resurgence in Covid-19 cases in the US has caused multiple states to reintroduce lockdown restrictions. Stock prices have still managed to recover back to trade positive year-to-date. Most of the gains in the stock market is likely due to optimism for the US government for additional fiscal stimulus as well as positive vaccine trials data. This suggests that the US stock market may be overheated thanks to growing speculation for a potential vaccine and stimulus measures. If a correction is due, then safer assets is likely to benefit from a selloff. Gold may as a result be able to maintain its steadiness amid a stock selloff.

Gold’s correlation with the S&P500 has returned back to positive, but history suggests that it is more likely to return back to an inverse relationship

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The Gold/Nasdaq 100 relationship suggests that there the Gold/Nasdaq 100 relationship may gap closer towards the Gold/SPX relationship in the short-term

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The upcoming presidential elections may also provide some upside for gold as investors hedge against the uncertainty in regards to US President Donald Trump's chances for a second term. As recent polls suggest that Former Vice President Joe Biden has a lead over Trump, there will likely be concern on the outlook for the US post-November elections since Biden's approach to US-China relations and global trade will probably be different as compared to the current one. As a result, we do expect slightly more upside for gold ahead of November’s elections

While VIX has fallen below the 200-day moving average, the fear index still remains higher than the 1000-day average, suggesting that there is still some volatility in financial markets

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There may however, be a short-term correction to gold prices after the strong rally. Its record high price at 1,900.20 may also provide some resistance for gold since investors may well likely take some profit off of that level and shift into other safe haven assets such as the Japanese yen or Swiss franc and possibly even the euro.

Over a longer time, the outlook for gold still appears to be stronger than the dollar. Record levels of fiscal stimulus will most likely have some downward pressure on the greenback as demand for its safe haven properties fade. The US' troubles in containing the novel coronavirus in comparison to other large economies such as China or the European region also suggests that its economic recovery will likely lag other developed economies as well. This stems from the fact that as the US continues to experience accelerating cases in the US, its health care system will experience greater pressure and eventually force more serious actions from state and the federal governments. This effect is already apparent with Trump encouraging Americans to put on masks and asking younger Americans to avoid crowded bars, a shift from his earlier tone regarding the pandemic. As time passes, the dollar should also start to experience lower demand for its safe haven properties since the likelihood of an economic recovery starts to increase and the prospects for a potential vaccine grows.

The US hasn’t been as effective in containing the spread of the novel coronavirus in its economy as compared to other countries, while the aggregate number of confirmed cases around the world shows no signs of slowing

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As a result, we see gold experiencing a minor pullback before reaching the all-time high at 1,900.20's level, possibly back below 1850.35's level and range between 1815.80 and 1850.35. But, in the medium-term gold looks more likely to gain closer towards 1900.20's level and possibly break that resistance and trend higher towards 1950.00's level. Our longer-term outlook for the precious metal also supports this outlook as well, since gold is likely to benefit from a lacklustre performance from the greenback following the strong levels of stimulus from both the Fed and US government.

Technical Analysis:

XAU/USD

Gold prices just broke past the resistance at 1850.35 earlier this week and looks on track to test its all time high at 1900.20. While the MACD indictor continues to confirm that the precious metal is on a bullish trend, RSI suggests that a downside correction may be due soon, as the benchmark continues to trade in the overbought region. It looks likely that there will be some downward pressure on gold, before it reaches the all time high at 1900.20, as investors take profits for the short-term. This would mean that we may see the precious metal fall back towards 1850.35. However, the fundamentals for XAU remains strong, signalling that the support at 1850.35 may be able to hold. This would allow bulls to gain steam and push gold to test the 1900.20 and likely break it to rise towards 1950.00’s level.

Support: 1.3557 / 1.3493 / 1.3375

Resistance:  1.3629 / 1.3684 / 1.3800

XAU/USD Chart (H4)

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