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Spot Gold finally pushes past $1,800

Gold finally pushes past $1,800 as retail investors plow $40 Billion into gold-backed funds.

Gold finally pushes past that psychological $1,800 mark

As Coronavirus cases around this world approach 12 Million, Gold has seen a 19% rise year to date as investors continue to crave safe havens. HSBC's James Steel stated that prices" were already rallying well before the emergence of Covid-19", which has given Gold more momentum. Furthermore, the increase in Gold's investment has helped offset a collapse in Jewelry demand, with HSBC estimates being down 20% this year.

There have been other factors other than the Coronavirus increasing the demand for Gold. A low-interest-rate environment and quantitative easing tend to boost demand for metals as investors start looking for alternative safe investments that may provide capital gains.

Banks are Bullish on Gold

James Steel predicts a push to $1,845 by the end of this year, before dropping to $1,705 the next year. However, some banks are more bullish on the bullion. They predict Gold prices to reach $2,000 in 2021, citing low-interest rates and devaluing the USD due to Quantitative Easing. "Gold investment demand tends to grow into the early stage of the economic recovery, driven by continued debasement concerns and lower rates. "Alongside this, JPMorgan recommended investors to stick with Gold in the midterm, citing similar reasons.

It is interesting to note that clearly demand for Gold has been steady, pushing the price higher. However, at the same time, the demand for risk on the asset are still high, evident in the new records being set by the NASDAQ and many risks on stock such as Tesla and Amazon. It shows that this massive divide with investors is cautious of the recovery, and investors who think quantitative easing and fiscal stimulus will continue to prop up asset prices. If the economy continues to recovery, we are likely to see Gold move to the downside.

Will Gold breach $1,900? Anish has some brilliant analysis of the future price action of Gold and Silver. You can watch it here.

Gold may see $1,800 if there is a second wave

Gold has been rallying in the past couple of days as stocks dip. Threats of a second wave hitting the western countries alongside fears extraordinary quantitative easing will devalue significant currencies have traders and investors seeking refuge.

Gold has been outperforming bonds as the safe ballast as of lately with the Coronavirus pandemic ravaging economies all around the world. To South Korea shutting nightclubs to China, ushering in new restrictions, a second wave hitting Asia is spooking market participants. It is a reminder to many countries coming out of lockdown that the real test has yet to come.

Gold has been rallying in the past three days edging closer to that psychological $1750 mark. This mark has been tested in the past two months, but bulls cannot fully break past it. Unlike oil, there have been many investors turning to physical Gold as a storage of wealth. Due to travel restrictions, Gold has been fighting COVID kits for space on planes due to hedge funds and investments in Gold ETFs craving this age-old storage of wealth. However, hedge funds have been touting a more fundamental reason as to why they believe Gold will increase in value – fears that extraordinary quantitative easing (QE) will devalue significant currencies.

Paul Singer's Elliot Management told his investors that Gold was "one of the most undervalued" assets and that its fair value was "multiples of its current price", citing "fanatical debasement of money by all the world's central banks" and low-interest rates. Has this been the case in past recessionary periods?

Less Quicker Maths

We can take a look at 3 significant instances where central banks implemented quantitative easing: Bank of Japan in 1997, The Federal Reserve in 2009, and the European Central Bank in 2015. For each case, I took the currency that the central bank was situated and paired it with a currency that was not implementing quantitative easing. I took the returns of the currency pair against the returns of Gold a year after the central bank implemented quantitative easing, and attempted to see whether there was a correlation between the two.

Year/Country Currency Pair Correlation
Bank of Japan, 1997 USD/YEN -.50
Federal Reserve, 2009 USD/GBP -.64
European Central Bank, 2015 USD/EUR -.53

The results show that there was a negative correlation between the returns of the currency and the returns of Gold ie. As the currency of the country that was implementing quantitative easing depreciated, the value of Gold appreciated. Suffice to say; these hedge funds may be onto something.

However, a breach of $1,800 may require both a second wave alongside central banks' quantitative easing. But a second wave may wreak havoc in other parts of the market, making a break to the upside in Gold possibly redundant.

Anish Lal did some great technical analysis Gold. You can watch it here.