After more than three years of stagnation, gold has awakened with a vengeance since early-March and has promptly surged by nearly $300 an ounce or 14% to an all-time high $2,330 -- a sharp move for a safe-haven asset that has a reputation for its slow and steady trends. Gold’s powerful rally came seemingly out of the blue and has confounded the majority of investors and commentators who have been much more focused on trendy speculative stocks and cryptocurrencies as of late. In this piece, I will explain several of the technical and fundamental factors that are driving gold to all-time highs, what is likely ahead for gold, and how investors can best take advantage of the yellow metal’s resurgence. A Look at the Technicals The chart of gold over the past year shows how it suddenly sprang to life over the past month. There was an important technical resistance zone from $2,000 to $2,100 that had been acting as a price ceiling for gold since the middle of 2020. Gold’s successful close above that zone signified that a new rally had begun even though the fundamental drivers of it weren’t exactly apparent just yet. Gold’s multi-decade chart shows that it has been steadily climbing an uptrend line that began in the early-2000s as the U.S. and other countries kicked off an unprecedented debt binge that shows no signs of stopping whatsoever: Gold is Rising Despite the Strong U.S. Dollar What’s particularly interesting and notable about gold’s surge over the past month is how it has occurred independently of the action in the U.S. dollar. Gold and the U.S. dollar have a long-established inverse relationship, which means that strength in the dollar typically causes weakness in gold, while dollar weakness typically causes the price of gold to rise. The chart below compares gold (the top chart) to the U.S. Dollar Index (the bottom chart) and shows how action in the dollar often causes an opposite trend in gold. Gold’s recent surge took place while the dollar was trending slightly higher, which is a sign of gold’s strength due to its ability to buck the negative influence of the strengthening dollar. Mainstream Investors & Journalists Missed Gold’s Rally
What is also worth noting is how gold’s surprising recent rally has received very little mainstream attention by a press that is much more enamoured with hot AI stocks as well as Bitcoin and other cryptocurrencies that have recently benefited from the U.S. government’s approval of a number of Bitcoin exchange-traded funds (ETFs), which has resulted in tremendous inflows from institutional investors and retail investors alike. As the chart below shows, investors have pulled billions of dollars worth of funds from gold ETFs in order to re-invest in Bitcoin ETFs, which is ironic considering its timing shortly before gold’s lift-off (and is confirmation of contrarian investing principles). The continuation of gold’s bull market will likely lead to funds flowing back into gold ETFs, providing additional fuel for the rally. Central Banks Are Steadily Accumulating Gold Though Western retail investors (who are often considered to be the “dumb money" in the market) have been sleeping on gold before and even during its surge of the past month, central banks -- particularly those in Russia, China, Turkey, and India -- have been steadily accumulating practically all of the gold that they can get their hands on. According to the World Gold Council, central banks purchased a healthy 1,037.4 metric tons of gold in 2023 in an effort to diversify out of the U.S. dollar and other fiat currencies that are being debased at an alarming rate and into a hard asset with a six-thousand year history as sound money that cannot be printed. Chinese Investors Are Buying Up Gold Chinese investors who are seeking refuge from the country’s sinking property and stock markets are another important driver of gold’s nascent rally. Starting in the mid-2000s, China’s property and stock markets embarked on a seemingly unstoppable bull market as the country’s economy grew rapidly and the country began to increasingly flex its economic and geopolitical muscles on the world stage. Unfortunately, like Japan in the 1980s and the U.S. in the mid-2000s, China’s asset boom was actually an unsustainable bubble that was driven by copious amounts of debt and reckless speculation. As all bubbles eventually do, China’s property and stock market bubbles have burst over the past year causing at least hundreds of billions of dollars worth of losses -- including $100 billion alone from the country’s property tycoons. As faith in China’s economy and financial markets sinks, investors are turning to the old standby, gold, which has thousands of years of history in China as a superb store of value in good and bad times alike. When complex financial systems and products fail, as they currently are in China, savers and investors appreciate the simplicity and straightforward nature of physical gold. As the famous financier J. P. Morgan once said, “Gold is money. Everything else is credit." According to the World Gold Council, consumer demand for gold in China increased by a stout 16% in 2023, while demand for gold bars and coins rose by an even more impressive 27%. Retail gold buying in China has been dominated by the younger generations who face a difficult job market and are largely priced out of the country’s unaffordable housing market but find physical gold to be attainable -- even if it means buying tiny amounts of it at a time as funds allow. Indeed, one of the most popular gold bullion products among young Chinese are gold beans that weigh as little as one gram and cost approximately 600 yuan (USD$83).
0 Comments
Leave a Reply. |
Thank you for choosing to make a difference through your donation. We appreciate your support.
This website uses marketing and tracking technologies. Opting out of this will opt you out of all cookies, except for those needed to run the website. Note that some products may not work as well without tracking cookies. Opt Out of CookiesCategories
All
Archives
April 2024
|