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Case for gold bulls remain

HYCM

By Giles Coghlan, Chief Currency Analyst at HYCM

Gold to eye $1800

The surge in gold still looks well set to continue. A test of $1800 is the next big round number in sight and looking at the XAUUSD chart technically we can see gold coiling up on the daily chart and looking set to break higher. Typically when we see price coiling in this way it is just before an explosive breakout.


The fundamental outlook is good for gold to go higher over the next few months. Latest data from the World Gold Council show that global holdings of gold backed ETF’s have just hit a record high. Here is an excerpt from their report:

Gold ETFs saw the highest quarterly inflows for four years amid global uncertainty and financial market volatility. Holdings of these products reached a record high of 3,185t by the end of Q1.

Looking in more detail at the World Gold Council’s Q1 data shows some interesting detail. Over the course of Q1 2020 understandably we have seen less jewellery purchases. No-one wants to or has been been able to go jewellery shopping. A key takeaway for me here is that once lockdowns are lifted we can expect to see jewellery demand rise again. That, in conjunction, with more ETF buying should push gold demand much higher for the next quarter. Take a look at this chart below and look at the ETF and Jewellery levels of demand in particular as highlighted below:


The case for a higher gold price is further underpinned by the prospect of low interest rates for years to come. The potential for currency debasement is high now as fiscal stimulus from governments and monetary policy measures from central banks are implemented. Gold offers a place to seek Alpha in this environment and a test of $1800 would seem the obvious next target for gold bulls.

The main question is how to time gold buying

You could buy a gold ETF. That saves the issue of leverage if you buy in real money.
Another option would be to buy at market here with stops below $1636 and look for the break of the daily coil.

What can stop golds break higher right now?

A rise in fear and heavy equity selling will result in gold moving lower. Although gold is normally a safe haven and would rise in a crisis, this is not the case when the crisis is extreme. If you look back to 2008/2009 you can see that gold prices initially moved sideways and lower as the crisis unfolded. Around the COVID19 crisis it has been the same. When equity markets sell off heavily, gold falls and the USD rises. So, any big shocks could keep gold moving sideways or cause it to fall. Aside from that, any further falls in volatility, that is a calming of the markets, will support higher gold prices medium term. At the moment the case for gold bulls is outweighing that of the bears.

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