Gold has always been a unique metal. Even before the advent of conventional money, it was already money as well as raw material. Nowadays, gold is still a major savings instrument. It is one of the main reserve assets of most central banks in the world.
It would seem that in the current world and market situation, the yellow metal should be rising in value, but it is not. What is wrong with gold?
Obviously, gold is under a certain pressure from the banks, which have tried to substitute the notion of current inflation in the USA, which supposedly does not harm the economy in any way. In such a situation, gold, which has always been a protective mechanism against inflation and has been involved in the preservation of savings, has been rendered unnecessary. Hence the sell-offs over the last few months. It is suspected that in the face of such allegations there are deliberately large sales of gold in order to push the price as low as possible. Who could benefit from this? Probably those who want to buy it well below.
It is worth looking at the rest of the commodity markets to see the big picture. In recent weeks, many commodity prices have risen to multi-year highs and some have beaten their historical highs. Those commodities include copper, platinum and oil. Silver, which has almost always followed the lead of gold, is in a completely different position and is about to make another peak.
This correlation with other commodities gives a signal that gold is most likely now in a phase of rest and correction from the all-time highs that were reached last summer.
There are several reasons that a gold rally is already looming somewhere on the horizon. The first is that gold has always been an indicator of inflation. During the 2008-2011 crisis the value of commodities was very high due to fiscal policy and stimulating the economy by increasing the money supply. Now funds are being injected into the US financial system far in excess of past amounts. Trillions of dollars are coming into the market which will affect the price anyway. Will the market not react appropriately? It is unlikely. The second sign is US inflation which is likely to be higher than the Fed is presenting. Lower bond values and insufficient bond buying will put inflationary pressure on the economy anyway, which will drive up the price of gold.
The third sign is that the dollar is the world’s reserve currency. The value of the dollar against a basket of currencies is now at its lowest values since February 2018. A weak dollar should also support the price of the precious metal.
To summarise, gold has taken a short break for now before taking a serious spurt upwards.
What’s in store for us today?
10.30 UK composite PMI for February
14.15 US non-farm payroll change from ADP for February
16.30 US Crude Oil Stocks
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