Nicole WillingGold has been the commodity to watch so far this year, rising by around 15 per cent as the economic impact of the Covid-19 pandemic has created a risk-averse environment that has driven investors towards safe-haven assets.
Unprecedented central bank intervention in the financial markets and government stimulus has made gold an attractive store of value. There is increased uncertainty about the effect on the global economy, as countries around the world ease their lockdown restrictions in response to the slowing of the rate of coronavirus infections.
With gold trading around its highest level since late 2012, investors are wondering: Is it the best time to invest in gold, or has the rally reached its peak?
This article summarises recent gold market news and what gold price analysis suggests for the future direction of prices. Scroll down for a video in which our chief market strategist, David Jones, explains what has been driving the gold uptrend in the last few months and discusses what gold chart analysis indicates for the outlook for the rest of 2020.
Gold price update: economic concerns push prices higher
The gold market has been in an uptrend in the last few years, and that trend has accelerated in 2020 as the macroeconomic environment has prompted investment interest in the precious metal.
The gold price climbed by $100 per ounce from the beginning of January until late February, then became increasingly volatile as the escalation of the Covid-19 crisis saw investors unwinding their positions in March to meet margin calls. The price fell by $200 per ounce from the $1,675 per ounce level to $1,475 per ounce in late March, then rallied to $1,769 per ounce in mid-April.
The gold price traded between $1,688 per ounce and $1,756 per ounce in the first half of May, rising on a combination of bearish economic data and renewed trade tensions between the US and China.
On the economic front, first-quarter GDP data released this month shows that the US economy contracted by 4.8 per cent, its largest decline since the financial crisis in 2009. A slew of other economic data was similarly bearish. The US consumer price index shrank by 0.8 per cent in April and US unemployment climbed to 14.7 per cent, the highest rate since the Great Depression. US factory production in April plunged by the most since records began in 1919. The yield on 10-year US Treasury bonds fell to just 0.62 per cent. And in China, the world’s second-largest economy, GDP shrank by 6.8 per cent, the first decline in decades.
The J.P. Morgan (JPM) global composite purchasing managers’ index (PMI) fell to 26.5 in April, down by a record 12.7 points from 39.2 in March and far below its previous low of 36.8 in November 2008. The rate of global economic contraction accelerated to its sharpest in the nearly 22-year history of the PMI survey.
Tensions have been rising between the US and China over the spread of Covid-19 and the implementation of the first phase of their trade agreement. With the US threatening to cut economic ties with China, concerns about the impact on global supply chains are compounding concerns about the full extent of the effect of the pandemic on the global economy as countries begin to ease restrictions.
US Federal Reserve chairman Jerome Powell said last week that the pandemic raises longer-term concerns about the economy. Although it will likely begin to recover in the second half of the year, some sectors that have been hit particularly hard – including travel and entertainment – could remain under pressure until the end of next year.
The Federal Reserve will continue to use its available fiscal tools to the fullest until the economic recovery is well underway, Powell said. While the US is not considering setting negative interest rates, negative real rates in various countries around the world are bullish for gold and look set to continue in the near term.
Gold analysis: technical levels point to the potential for a breakout
Watch David Jones, chief market strategist at Capital.com, explain what the gold price technical analysis indicates for the gold price in 2020 and give you a suggested trade for your portfolio:
The updated gold analysis shows that if the price breaks out above $1,800 per ounce then there is little resistance before $2,000 per ounce. Gold could come under some short-term pressure, but any dips are likely to be buying opportunities. There is support from around $1,560-1,660 per ounce. The gold price forecast 2020 will depend in part on how the dollar will perform for the remainder of the year.
The jump in investment interest so far this year has outweighed lower physical demand for gold jewellery from key buyers in India and China during the Covid-19 lockdowns, which could pull the gold price back. “While the unprecedented interventionist monetary and fiscal response to counter the effects of COVID-19 provides a great case for gold to play an increasingly large part of any portfolio going forward, the lack of physical support does make a case for those overexposed to lighten up,” said Nicky Shiels, commodity strategist at Scotiabank, indicating there could be dips to come.
But there is still upside potential over the longer term. “We continue to be unequivocally bullish gold over the longer-term,” analysts at Blue Line Futures said in a research note. “Gold is out above our momentum indicator… which aligns with previous resistance at 1709.2-1711.8 and this is very favourable for the bull camp as it looks to secure a breakout of its consolidating wedge pattern.”
“While the near term concerns clash force with long-term expectations that gold should perform particularly well amid extreme monetary inflation, our expectation remains that, when the dust settles, capital will seek to shelter itself from a prolonged period of negative real rates following the pandemic,” analysts at TD Securities said, adding that “trend followers have grown their gold length in recent days amid normalizing volatility.”
“It is hardly surprising that gold ETFs are seeing an unchanged high level of buying interest," Commerzbank analysts said. "If speculators were now to jump on the bandwagon too, gold would rise quickly towards the $1,800 mark."
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