27.07.2020 – Special Report. Stellar performance in gold – the yellow metal is occupying traders and investors more than ever. Will gold become the new, eternal fixed star in the inflationary investment firmament? Or will the precious metal just be a supernova that will soon implode? The fact is: Gold is at its all-time high in dollars. The question is whether, in chart terms, a cup with a handle will form – which would be a super-bullish formation. Or whether the rush will end in a miserable double top. Which would please the bears. We highlight the backgrounds.
Gigantic cup – still without handle
Friends of chart analysis point to a gigantic cup formation that has been training in textbook fashion since 2011. According to chartists, when the chart image is to be completed, a sideways/downward movement is first of all necessary to form the handle of the cup. And then the price of gold should hiss steeply northwards. The sideways hesitation arises because many investors do not like to buy at the high and wait for a cheaper entry.
Mike Shedlock said on the blog MishTalk that the last resistance remains the intraday high of gold at $ 1,923 in 2011 and that the yellow metal has now formed a nice cup, albeit still without a handle.
In short, Shedlock said that gold always performs badly when confidence in the central banks is high. But the bursting of the DotCom bubble has now been followed by three major bubbles. Nothing has changed: The Fed is currently only supporting the financial market, but is not creating jobs and cannot cure Covid-19. In short: The Fed is pumping up a bubble. And Shedlock sees no end to this policy.
Great Debasement of paper money
Michael Hartnett, Chief Investment Officer of Bank of America, warned of the “Great Debasement”, i.e. the great devaluation. What is meant is the dollar, that is, the paper money. Because of the Great Repression, the Federal Reserve is currently experiencing a Great Debasement. The bond market has been nationalized by the Fed and is therefore no longer sending out meaningful inflationary or deflationary signals.
In concrete terms: investors could no longer use short bonds to hedge against the inflation risks created by the $11 trillion stimulus. The result would be only “short dollars” and “long gold”. In other words: Since the Fed devalues the greenback with freshly printed money, the only way to sell the greenback or buy gold is to sell it or buy gold.
The end of Fiat Money
And Jim Read, an analyst at Deutsche Bank, just came out as the Gold Bug. The expert concluded, “fiat money will be a passing fad in the long-term history of money.” This is drastic. The term fiat money comes from the Latin word fiat and means “It shall be done! Let it be!”, as in “fiat lux” – let there be light. Fiat money is therefore an object without intrinsic value. And Reid went on to say: “Gold is definitely a fiat money hedge.” Gold is therefore a hedge for paper money that is about to reach its historical end.
Price target 2,000 and 5,000 dollars
Citibank recently judged that gold is benefiting from the relaxed monetary policy, low real interest rates and the influx of money into index funds at record levels. The chance that gold will rise above 2,000 dollars in the next three to five months is 30 percent.
There is even better: Diego Parrilla, who manages 450 million dollars in the Spanish investment fund Quadriga Igneo, said Bloomberg that the gold price could rise to as high as $5,000 an ounce. This in the next three to five months. Because in the coming decade, governments would save everything and everyone with the printing press to prevent a collapse of the system.
Central banks and retail traders are buying
In fact, the masters of money themselves bet on gold. According to figures from the World Gold Council lobby group, the world’s central banks continue to make steady and moderate purchases. In May, for example, they put 39.8 tonnes of gold in their vaults, which is slightly more than the four-month average of 35 tonnes. Even if it is 31 percent less than in the previous year’s month, which was extremely buoyant. All in all, this year’s total was already plus 181 tonnes.
Apparently not only the professionals are taking a liking to gold: As the brilliant blog “ZeroHedge” reported, young amateur traders are currently flooding the gold market via the “Robinhood” platform on the buyer side.
Gold fan for the Fed
And maybe the current gold rush has something to do with the likely imminent naming of a gold bug as governor of the Federal Reserve. Judy Shelton will probably be taking that very line in the Fed in the future.
Michael Msika, Bloomberg’s economic commentator, pointed out another interesting fact: since March the gold price has been rising. While the yellow metal is knocking at an all-time high, mining shares are still far from their 2011 high and there is therefore potential for a catch-up in these shares.
Possible double top
Our conclusion: In the end, the arguments spoke clearly in favour of the bulls. However, it is also possible that the bears rub their paws: A double top is possible – this would indicate a coming deep fall of the precious metal. This could be the case if confidence in one’s own future returns, for example in the wake of a corona vaccination, the economy picks up again and the world’s central banks and governments cut back on stimulus. We will keep an eye on the matter for you – the Bernstein Bank wishes you successful trades and investments!
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