Gold is back in the spotlight having reached new absolute records today in a market context that continues to reward not only the yellow metal but also all other “risk-on” assets. Here are the factors driving gold and the technical levels to keep under observation.
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Gold runs in an unusual scenario
Gold continues its steady climb to new highs, with today’s prices hitting a historical record of 2,222.91 dollars per ouncebringing the market capitalization to $14.789 trillion, up about 7% since the beginning of the year.
This trend comes alongside the positive performances of other assets such as stock indices and Bitcoin. An exceptional event, given that the yellow metal is generally included in portfolios to diversify from other risky assets. Also, it goes in countertrend compared to the traditional negative correlation with interest rates: Usually, the price of gold increases when interest rates fall and decreases when they rise.
This phenomenon occurs especially in times of economic uncertainty, crisis and growing concern about a possible recession. Therefore, gold is commonly considered a safe haven during times of financial difficulty.
The World Gold Council’s Gold Demand Trends report indicates that annual gold demand (excluding over-the-counter trades) fell to 4,448 tonnes in 2023, a 5% decline from a particularly robust 2022. However, if demand from OTC markets and other sources is also considered, total demand has reached a new annual record of 4,899 tonnes.
According to Swissquote analyst Carlo Alberto De Casa, gold has not yet fully incorporated the scenario of recent months, characterized by progressive disinflation and expectations of rate cuts. Scenario also confirmed yesterday by the Fed in the so-called “dots plots”, officials’ projections on the cost of money, which always indicate three cuts during 2024.
The technical point on the gold chart
Seeing the trend of the gold futures chart, it is evident a notable growth trend. After peaking in August 2020, the price maintained relative stability within a range of $1,678.0 to $2,066.0 for an extended period of three years.
However, last month it finally did surpassed the key resistance at $2,066.0, setting new all-time highs. A temporary move back towards the $2,066.0 level, along with the trend line, could be anticipated in a pattern known as a “pull back”.
It is important to note that even the minimal corrections are healthy for the overall trend and offer opportunities to investors interested in entering the market. A key element to watch closely regarding the future of the gold price is interest rate decisions. Furthermore, any possible sign of a possible recession could cause the price of gold to soar towards exceptional values.
Dollar and falling yields support prices
“The surge followed the confirmation of theFed commitment to cut rates. Recent economic indicators, including persistent inflation and strong US economic data, had clouded the economic outlook, leaving investors uncertain about the central bank’s stance on interest rates,” explains Ricardo Evangelista, Senior Analyst at ActivTrades.
However, he continues, “yesterday’s confirmation served as a relief valve, triggering a surge in risk appetite on the stock markets. Both the S&P 500 and Nasdaq hit record highs, while the dollar weakened, giving a significant boost to gold prices. With the reduction in interest rates now virtually assured, which could begin as early as June, it is expected that i Treasury yields fall and the dollar softens furthercreating further upside for the metal.
Evangelista concludes: “this increase could be mitigated by reduction in demand for safe haven assetsas optimism about a soft landing for the US economy will likely further fuel risk appetite in financial markets.”