Gold : Hit Higher High
(Sat, 25 July 2020). Spot gold is about to reach record highs in the dollar, after already hitting new peaks in other major currencies. While it may be too late to buy gold at relative value, its fundamentals suggest higher highs are on the horizon.
Gold prices hit $1,900 Friday. Bullion is trading at the highest level since 2011. This time, however, the move is sustainable. Gold prices topped $1,900 per ounce Friday morning. The last time the metal was priced this high was in 2011. It likely won’t stop until it hits new highs.
That’s just when looking at gold in terms of U.S. dollars. Prices of the metal have already hit new all-time highs this year in the euro, Japanese Yen, and other currencies. The dollar is simply the last primary currency to the party.
The Reasons for the Stellar Rise in Gold
One of the best-performing assets of 2020, gold has been steadily heading higher since 2016 after bottoming near $1,050 per ounce. The gold market is partying like it’s 2011, and this time it looks like the metal has far more room to run. While it generally hasn’t been as exciting as the stock market, the move higher has come about for several reasons.
First, demand has remained robust, from both retail buyers and central banks, which have been large buyers for years. This has kept demand steady, with periodic surges in buying during times of market fear. On the supply side, gold mining exploration peaked globally years ago, and we may have hit peak production. As with many other commodities, the proverbial low-hanging fruit has been plucked, and there haven’t been any major mother lodes discovered in years.
Unlike most commodities, gold doesn’t get “used” in a traditional sense, so nearly all the metal ever mined in human history still exists. These trends combined to halt gold’s drop from 2011 to 2016, and also explain why bullion price tends to make higher highs without seriously retesting prior lows. It also explains gold’s relative performance in the last two years, as market fears and crises have accelerated over trade-war and pandemic fears.
Why The Rally is Different This Time
Back in 2011, gold’s rally came at a time of crisis. It was a few years into the economic recovery, and there was a pervasive fear that the money creation of the bailout would lead to imminent and higher inflation. Traders who misunderstood how deep deflationary trends were at the time suspected gold prices would go through the roof, so they bid it up.
The worst came in mid-2011. At the height of a debt ceiling crisis, traders feared the ruination of America’s credit rating. While Standard & Poor’s lowered its rating on U.S. debt, the crisis was averted. Finally, the gold rally in 2011 that sent prices over $1,900 was part of a speculative move. Gold prices went parabolic.
This time, prices have been rising far more steadily, which suggests there’s still a longer-term trend ahead. That’s especially true as central banks have moved to recreate the money-printing policies that led to the big rally to $1,900 the first time around.
With so many dollars now being printed, it’s surprising that prices have taken this long to retest all-time highs. All gold has to do first is break out of its last resistance point at the old all-time high. It’s too late to buy the metal at relative value, but traders still see it as a necessary hedge for whatever lies ahead.
GFS ASIA TEAM
- just now