2020 has by far been difficult for most people, but it’s definitely been a great year for gold and gold owners. Gold has seen exponential growth to the point where its holders are in a state of euphoria with the feeling that they can do no wrong and their safe haven will last forever.
Before we get ahead of ourselves, let’s not forget the Gold Rush of 2011. Gold was on the pages of magazines and newspapers, it was the talk of taxi drivers, personal trainers and hairdressers. Gold investments were indeed the golden opportunity. But over the months and years the rush died down.
A similar situation happened at the end of 2017 with Bitcoin. A once dodgy unknown coin, used by tech geeks and criminals, Bitcoin became a rock star. It was the main topic among friends, at birthday parties and your aunt’s house, where you once only talked about politics and the weather. When BTC was at 18,000 USD, everyone was convinced it would soon hit 100,000 USD, spoiler alert; it didn’t.
The popularity of an instrument is not the cause of its demise, but an exaggerated hype around an asset is a red flag which appeals to the part of my brain that’s responsible for making investment decisions. The way I see it, by the time something has made it to the cover story, it’s usually too late to invest in it. Smarter traders have already done that, and pushed it to its peak, now they’re look for a way out, leaving space for the less experience and more emotional to jump in.
Now back to gold; will it hit 3,000 USD soon? Perhaps, but frankly I wouldn’t hold my breath. I am myself a big fan of gold, I’ve invested in physical gold bars and I trade the CFD on my Forex platform. I think gold price movements are very technical and follow fundamentals in an understandable way, making it a preferred tradable instrument, that can be really rewarding with a proper strategy and risk management. But I still don’t think it will hit 3,000 USD anytime soon, why? Firstly, it’s already had its highs which in my opinion means it’s reaching its peak, as I explained before. Secondly, the reason gold has risen over the past months can easily be explained through fundamentals: uncertain times due to the COVID-19 outbreak and a weaker USD and both reasons will come to pass.
The pandemic will be over. Of course, the virus could mutate and turn us all into zombies, but in that case a financial crisis would be the least of our concerns. More likely, we’ll find a cure and everything will go back to normal, eliminating the need for capital protection in safe havens, and traders will move to something riskier. Also, currently gold is protecting us against inflation, which traders fear with all the unprecedented stimulus from central banks. We can’t forget though, that there are other instruments that can do that, like stocks (check the Stock Exchange in Venezuela and their inflation), and stocks will be a more favorable option in a risk on mode.
The second reason is the weak USD, but a weaker US dollar, has historically led to a spike in commodity prices, because they are quoted against the dollar. When the USD goes down against the EUR, it means that with less Euros we can buy more gold and that increases demand and hence the price of gold. It’s that simple. Can the USD stay weak forever? Technically it could, but that’s a very unlikely happenstance.
The USD has been struggling since May, but it should regain its power in the second half of the year. If it does, it will negatively affect the price of gold, making the 3,000 USD mark less achievable.
To conclude, my experience tells me that we are close to a correction in the price of gold rather than another bullish wave. I don’t intend to open short positions on gold, but I’m also not comfortable opening long ones either, when gold is so close to all time highs.
Provided by Axiory Global