Gold’s positive start to the week comes on the back of its recovery towards the end of last, when revived concerns over coronavirus dampened risk appetite slightly with the number of Covid-19 cases in the U.S. continuing to rise, while Germany saw a spike in cases and the situation in Brazil remains very bad. In fact, the World Health Organization has today reported a record increase in the number of coronavirus cases in a 24-hour period. So far, however, investors haven’t reacted too negatively to this, with European stocks and US futures holding onto their gains.
While gold is undoubtedly boosted by haven flows due to the economic damage caused by the pandemic as well as concerns over a second wave, there is little doubt that the metal is also finding good support from central bank money flooding the financial markets. Last week, the Bank of England became the latest central bank to expand QE while the Bank of Japan was characteristically very dovish, echoing the sentiment of other major central banks, including the ECB and the Fed. Collectively, the central banks’ vast QE programmes means bond prices will be kept elevated and yields depressed. The lower yields, in turn, should continue to boost the appeal of non-interest-bearing commodities such as gold and silver. This explains why the buck-denominated metal managed to rise last week despite the dollar index also gaining ground.
With long-term interest rates likely to remain very low thanks to central bank stimulus, and concerns over a second wave of infections elevated, the fundamental outlook on safe-haven gold therefore looks positive. There are, however, at least two key risks to this bullish outlook – although both are longer-term considerations. First, if investors become convinced that the economy will recover really strongly to the point that central bank stimulus is no longer needed. This is unlikely but is a possibility, nonetheless. Under this scenario, investors may favour more riskier assets over gold. The second key risk facing gold is if the economic weakness persists for a long period of time, to the point where physical demand for gold falls. So, economic recovery is essential if gold were to remain supported. But as mentioned, these are longer-term risks, and momentum is currently with the bulls judging by recent price action.
Is $1800 next stop?
All told, gold looks bright, not just from a fundamental point of view, but also from a technical viewpoint. After several weeks of trying, gold bulls finally appear to be winning the battle, as the metal tries to clear a key level of resistance circa $1745 last week. The metal created a nice hammer candle on the weekly chart and a bullish-engulfing-like candle on the daily on Friday. Gold now needs to hold its own above $1745 to sustain its bullish bias. However, in the event prices break lower and take out Friday’s low around $1720 then that could signal a shift in momentum. So, while gold does indeed appear bullish, traders must make sure to manage risk appropriately as anything can of course happen. For the bulls, the next objective is the liquidity above the most recent high at $1765ish, followed by the $1800 round handle next.
