Gold prices
Gold price is sitting pretty near the seven-year high as traders continue to remain optimistic about its prospects. Silver, its “poorer cousin”, is trading closer to its YTD high, which is incredible considering that its price was recently at a ten-year high. Therefore, is gold (XAUUSD) still a buy at a seven-year high? Let us look at some of top reasons why gold is still a buy at a multi-year high.
Central banks have been hard at work to support their economies this year. Most of them have slashed interest rates to encourage spending and lending. In the United States, the Fed has brought rates to a historic low of between zero and 0.25%. The challenge for the bank is that the number of coronavirus cases in the United States has been rising, which means that more support will be needed.
This is compounded by the fact that the bank has already done too much, including buying individual corporate bonds. Therefore, there is a likelihood that interest rates will remain this low. Also, there is a possibility that the rates will turn negative. As a result, this means that more savers will move to spend, and possibly invest in gold.
Recent data from South Africa shows that mining output has been falling. Another data shows that the number of coronavirus cases has been rising. This has led to increased challenges for the country’s miners. The implication is that there will be scarcity in physical gold, which will lead to higher gold price at a time of rising demand. This demand will come from investors and ETFs. Recent data shows that inflows into gold ETFs has been rising.
In addition to bringing interest rates to multi year lows, central banks have been printing unlimited amount of money. In the United States, the Fed is expected to expand its balance sheet to more than $10 trillion by the end of the year. This is a ludicrous number considering the balance sheet had less than a trillion a decade ago. The same trend is happening in Europe, China, and Japan. This is a positive thing for gold price considering that most investors view it as an alternative to fiat currencies.
In an article published yesterday, Lynn Alden made the case that gold was still under-owned. Lynn is a leading analyst at Seeking Alpha. She said that virtually no large investors own a substantial amount of gold in their portfolios. For example, according to Credit Suisse, global net worth was at $360 trillion. Of this, global equities represent just about $90 trillion. Therefore, since there is less than 200k tons of gold in existence, it means that it is valued at about $12 trillion. $10T of this is held by private investors. This means that there is a likelihood that more money will move to the metal.
Another reason why gold price is headed higher is momentum. As the price goes up, more people rush to buy the metal. Finally, as I wrote yesterday, there is so much dry powder in the market such that more of this money will be invested in gold.
Gold price is trading at $1783, which is slightly below the all-time high of $1912. On the monthly chart below, we see that momentum has been in gold’s side. The price has been in the green for the past three months straight. Also, the price is above the 50-period and 100-period moving averages. Also, the RSI has moved to the overbought level at 80.
Further, looking at the chart below shows that the gold price is forming a cup and handle pattern, which means that the price is likely to continue rallying. On the flip side, a move below $1,500 will invalidate this prediction.