Daily Market Recap – Has Gold lost its allure?

After reaching an all-time high above 2,000 in August 2020, gold has charted a less sparkling path in recent months, trending lower year-to-date.

With Covid-19 campaigns well underway, with varying rates of rollout across countries, the market has turned its attention to rising real bond yields and the potential emergence of inflation as the recovery takes hold.

This has been accompanied by a more reflationary tone in the equity markets, while industrial commodities, such as copper, have jumped on expectations of a full recovery. Gold, on the other hand, remained sluggish, which is perhaps not surprising given its countercyclical characteristics.

This is a tricky time in terms of the outlook for the gold price. It is not yet clear how far and how fast real rates can rise - high levels of debt may well limit yield increases - and while short-term inflation seems inevitable due to base rate effects, it is unclear how sustainable inflationary pressures will be.

A more optimistic scenario for the precious metal would be the emergence of broader inflationary pressures due to a combination of input price appreciation, a build-up of capacity constraints in industries, and real wage growth.

If the 2002-2007 scenario were to repeat itself, steadily rising inflation could hold down real returns and allow gold to perform creditably. On the other hand, if rising yields continue to dominate, in conjunction with a strengthening U.S. dollar, the environment will be more challenging for the precious metal.

From a technical viewpoint, gold stalling just below the 1,840 per ounce level is putting into question the sustainability of the latest surge. Should gold prices fail to hold above the 1,830 immediate support in the near term, there may be little to keep it from falling towards the next significant price point at 1,800. On the flip side, should buyers manage to maintain momentum, the longer-term target for gold will be to reach the 1,875 level in the coming week(s).

In summary, we are at a crossroads. Further signals will be required to determine the golds trajectory and whether the yellow metal will remain the darling of investors. It would also be remiss not to mention the new arrival: bitcoin (and more broadly cryptocurrencies).

(Chart Source: Tradingview 11.05.2021)

These could exacerbate the dampening effect on the price of gold due to their appeal to millennials. Millennials may view digital assets as interchangeable with gold because of their status outside the traditional monetary system.

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.