Gold prices are trying to stabilize in the $1750 area, and the market may be preparing to rise again after a more than six-month correction. Will gold still shine, and if so, what factors could help renew the uptrend?
Gold was highly coveted by investors when the first wave of the pandemic broke out and lasted. It was then associated with a safe haven and fulfilled its role as a hedge for worse times. After the first virus hit the financial markets, gold fell to around USD 1450 per ounce, and just three weeks later the price of bullion returned to its pre-decline levels. However, it wasn't until the vacations that investors began to storm gold, which also resulted in huge, the largest ever, inflows of money into gold ETFs. The price accelerated its rally in vacation 2020 from $1,800 to $2,075. It was a scale of increase not seen in a long time.
Hot capital did not live to see $3,000
Perhaps then, there was some overshooting in the market, which began to first consolidate and then systematically retreat, putting to the test those who placed capital in gold in above-average amounts during the summer months. The months-long market correction eventually forced earlier buyers to capitulate, resulting in record capital outflows from the aforementioned ETFs. It could be said that those hot money that speculatively counted on prices of $2,500-$3,000 an ounce withdrew from the market. This in turn was good news for those who were waiting for a correction in gold prices, as the hot capital may have already left the market and will not create a supply overhang.
What is important from the point of view of the fundamentals for the gold market is the level of real interest rates calculated on the basis of US bond yields minus inflation. The rise in interest rates on 10-year U.S. Treasury securities has slowed in the region of 1.6-1.7 percent, while inflation may accelerate, which could exacerbate negative real interest rates, and this could be good for gold.
What could help gold prices and what could hurt?
It is also worth looking at the VIX fear index contract and investor positioning based on CFTC reports. They show that as the price of the VIX contract fell, speculative investors did not open new short positions, they even closed them. If this is the case, gold could be a sure hedge against a possible increase in stock market volatility that could occur over the next several weeks. This could also be a positive factor for gold. On the other hand, prices could be negatively influenced by a significant strengthening of the US dollar or further negative sentiment and continuation of ETF unit sales.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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