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Don’t be fooled by the weak gold price

gold bar
Gold is weak currently but is expected higher.

In August, the price of an ounce of gold broke through the key resistance level of $2,000. Now it’s fallen back to about $1,700 per ounce.

Does this mean that gold is going to see a major drop in price?

Most analysts don’t think so.

“Gold prices have come under significant pressure in recent weeks, as fiscal stimulus talks, the rapid distribution of coronavirus vaccines, and rising inflation expectations drove yields on US Treasuries to the highest levels since early 2020, and in turn diminished the appeal of the non-yielding asset,” explains DailyFX analyst Daniel Moss.

However, President Biden’s proposed tax hikes, in combination with a Federal Reserve that is willing to retain its accommodative approach to monetary policy, could see gold recover lost ground in the near term, he continues.

“Biden has suggested that his $2.25 trillion infrastructure package should be paid in part by raising the corporate income tax to 28 per cent and setting a 21 per cent minimum levy on global corporate earnings.” All of this could push gold back up, Moss comments.

Biden has, in fact, turned economic sentiment around in the US, and there is considerable belief in a strong recovery. All of this tends to move investment out of the yellow metal, as it is the ultimate risk hedge.

Haresh Menghani, an analyst at FXStreet sees gold falling to below $1,700 to $1,650 for the time being. If the price of gold is to find a bottom, that will probably be in the spring, he forecasts.

Then, at the first sign of the recovery slowing down, funds will begin to head back to gold again. This is likely to move the price back up to near $2,000 in the medium term.

This forecast is supported by the fact that retail trader data from FXStreet shows that 88.94 per cent of traders are net-long in gold, with the ratio of traders long to short at 8.04 to 1. The number of traders net-long has been rising steadily, and this suggests that they are taking advantage of the low gold price to stock up. Meanwhile the number of traders going short continues to decline.

Investors should keep an eye on yields in various markets around the world when making decisions about investing in gold. If, for example, emerging markets bonds become attractive again, then gold may take longer to come back.

We’ve been in a low-yield climate for a long time, so much money has moved into gold.


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