Gold was considered a boring asset class until this month and the popularity was fading out amongst the investor community. The recent rally of about $1000 in the month of June 2019 and the move in the last two days triggered a 5-year breakout in the asset class on strong volume, thus confirming bull’s entry back into the game. Want to learn more about the basics of investing in gold? Join the NSE Academy Certified Currency & Commodity Markets course on Elearnmarkets.
Federal Reserve Outcome
The recent spike was the result of Fed’s commentary on Wednesday where although the Federal Reserve kept the policy rates unchanged in the range of 2.25-2.5% but hinted at possible rate cuts later this year for the first time in more than a decade if the economic outlook weakens. So the lower rate boosts the appeal of a non-interest bearing asset like gold which resulted in a sharp spike in the last 2 days.
Effect post-2008 Crisis
The yellow metal is considered as “Safe haven” during the time of crisis in economy. However, if you look at the chart of gold post-2008 crisis, it witnessed breakout from the Ascending triangle pattern in the last part of 2009 after consolidating for about 1.5 years. The rally post-breakout is history where it delivered a staggering 90% in a span of fewer than two years.
However, the returns generated by equity have outperformed gold in the same period. Moreover, historically equity as an asset class has outperformed other asset class in the long run.
Multiyear Breakout in Gold
Gold has again witnessed breakout from the ascending triangle pattern on strong volume after consolidating for more than five years. The recent breakout is quite similar to the pattern formed in 2008-2009 and this rally is likely to continue in the medium term if the metal holds 1375-1400 level on a weekly basis and sustain above the mentioned level.
Another bullish signal for gold is that central banks are continuing to buy the metal as countries diversify their assets away from the U.S. dollar. China increased its reserves for a sixth straight month in May.
As we have seen in the past that gold has generally acted as a safe haven investment in times of high inflation or war or some type of financial crisis. In those scenarios generally risky assets like equities, lower-rated bonds, industrial commodities like crude, copper, etc see sharp fall in prices while Gold prices see appreciation due to flight to safety.
If we look worldwide macro scenario now we can find that growth has been slowing down across major economies like EU, USA, India, and China due to ongoing trade war initiated by USA and retaliation by China.
Overall inflation has been quite subdued and below the target level of major central banks. In spite of that, there is very little crisis scenario or recessionary trend so far.
Hence we can say that the Gold rally has been primarily driven by Fed outlook of a rate cut and ECB’s reiteration of easier monetary policy. RBI in India has also promised liquidity support to market to fuel growth.
Hence this is a liquidity-driven rally and if most of the macro uncertainties are sorted out and still inflation remains within benign limits, the Gold rally may lose steam going forward.
But for now, technically it has broken out from multiyear range in charts and as the saying goes in the market:
“PRICE IS THE KING”.
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