Golden Way Business News Release #4

Golden Way Business News Release #4

05.07.2021

Hello! Today, I present to you the fourth edition of the Golden Way business news. In this edition, we will talk about trends of gold prices.

The gold price has fallen sharply in the past week, recording its largest drop in five months after the US Federal Reserve (the Fed) indicated that it could increase interest rates earlier than expected.

The economic recovery from the COVID-19 pandemic continues, increasing inflation expectations that had supported a gold rally in April and May, but also raising the prospect of the Fed tightening monetary policy.

Where will the precious metal price move next? Should investors still allocate a portion of their portfolio to the safe-haven asset? In this article, we look at the latest gold price news and long-term forecasts.

But the trend of gold price rises came to a halt in response to rising US employment figures and comments by Philadelphia Federal Reserve President Patrick Harker that policymakers should begin considering when to taper bond purchases

The precious metal, which is considered a hedge against inflation and economic uncertainty, dropped by 4.7% to $1,774.80 per ounce, its lowest level since late April. The pullback came after a statement from the Federal Open Market Committee sounded an optimistic note on the recovery of the US economy.

“Progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened,” the statement said.

Fed Chairman Jerome Powell also indicated that the central bank would begin discussing tapering bond purchases.

Gold slipped further to $1,769 per ounce on the 17th of June and has since remained below $1,800 per ounce. There were further signs of economic recovery as data on US durable goods released on the 24th of June showed strong growth. New orders for manufactured durable goods increased by $5.7 billion to $253.3 billion, a 2.3% increase after a 0.8% decline in April.

Flash US manufacturing purchasing managers’ index data on the 23rd of June showed the largest improvement in operating conditions among goods producers on the record, as the index rose to 62.6 from 62.1 in May. A figure above 50 on the index indicates expansion inactivity. Rates of output and new order growth remained well above average.

A stronger economy typically reduces investor appetite for gold and other precious metals, as holding gold does not pay interest or dividends. An increase in interest rates from historic lows of close to zero is expected to weigh heavily on the gold price, which is causing the market to react strongly to economic indicators and comments by Fed officials.

Physical demand for gold also offers a mixed picture. In China, consumer demand was supported in May by purchases for holidays and weddings, according to the World Gold Council. But the escalation of the COVID-19 pandemic has disrupted purchasing during the second quarter in India, the other major global market. Central banks continue to add to their gold stockpiles.

The Gold Council said: “Sizeable purchases from Thailand and Hungary in recent months support expectations for healthy net purchases by central banks this year.”

What do these trends indicate for the future gold price? What is the outlook from gold analysts?

Gold price forecast: can the market return to $2,000?

The gold price remaining below $1,800 per ounce indicates a “lack of an immediate impetus to buy the yellow metal”, analysts at Canadian bank TD Securities said in a note on Thursday, “as the Fed clarified its reaction function with respect to an upside scenario in inflation, which suggests the Fed isn't behind the curve by any means.”

But the analysts added that “pricing in rates markets is also too hawkish, with a first hike priced for December 2022, which is also inconsistent with the Fed’s message.”

Ole Hansen, an analyst at Dutch bank Saxo noted that “although the dot plot is not signaling any rate hikes before 2023, the fact the Fed suddenly signaled a willingness to consider tightening was something the non-yielding investment metals struggled to deal with and as a result gold, already on the defensive after getting rejected above $1900, broke down through several key technical support levels.”

Technical gold analysis shows that the break below the 200-day moving average at $1,838 per ounce opened the way for the metal to fall to $1,825, and with a lack of support it fell further to just below $1,800 per ounce, Hansen explained. With the relative strength index (RSI) approaching oversold territory it signaled most of the capitulation selling is done. The $1,798 per ounce to $1,770 per ounce range needs to hold and attract fresh buying interest to avoid a return to the March double bottom. There is resistance at $1,825 per ounce, followed by the 200-day moving average level at $1,838 per ounce.

“While dollar strength will pose a challenge, gold should be able to withstand rising yields as long as it is driven by rising inflation expectations. That was, however, not what we saw [on the 16th of June] so once again the million-dollar question is whether inflation will be a passing phenomenon or longer-lasting,” Hansen said.

Carston Fritsch, the commodities analyst at Germany’s Commerzbank, commented that “the combination of a noticeably firmer US dollar and higher yields poses quite a burden for gold. Whether it justifies a price slide on this scale is another matter, however.”

Fritsch noted that gold had already fallen in anticipation of a possible change in tone from the Fed given the performance of the economy, arguing the market was oversold.

It is important to note that regardless of what the current gold price predictions look like, global financial markets remain highly volatile. For that, predicting what the price of gold will be in a few hours, or especially over the long term, is difficult.

See you in the next edition of the Golden Way business news.

Think different, earn different!