Gold Under Pressure but Bullish in the Long-Term
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Gold Under Pressure but Bullish in the Long-Term

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Alejandro Ehrenberg By Alejandro Ehrenberg | Journalist and Industry Analyst - Tue, 06/09/2020 - 09:48

Gold price dropped 4 percent last week, falling below the US$1,700/oz threshold to US$1,675/oz. The yellow metal has climbed back up since then but is yet to break the US$1,700/oz level at the time of writing. Analysts attribute the changes to a renewed appetite for risk among investors, partly driven by promising US labor data. Although there is further room for contraction in the short-term, analysts have bullish outlooks for gold in the long-term.

While protests in the US and the COVID-19’s entrenchment in various countries around the world seemed to paint a bleak outlook, the US stock markets unexpectedly soared. Investors’ risk-averse behavior waned. As John Moncrief wrote for GoldPrice.org, “investors continued to sell bonds but also liquidated gold positions, sending spot prices as low as US$1,725/oz.” Moncrief went on to point out a big reason supporting the stock market’s rally: ADP presented a report showing that private payrolls fell much less than expected in May. As a result, “the primary safe havens came under heavy selling pressure: the US dollar continued its three-day slide, treasury yields ran higher and gold spot prices slid quickly,” he noted.

In an article for Kitco News, Neils Christensen says if stock markets and bond yields keep rising, it is reasonable to expect further falls in the gold price. Christensen quotes Marc Chandler’s opinion on the matter. Chandler, Chief Market Strategist at Bannockburn Global Forex, commented that “the yellow metal is in a US$50/oz range on both sides of US$1,700/oz. It frayed the upper end in mid-May, but it has now fallen for three consecutive weeks and finished last week at six-week lows. There is little to hang one's hat on until the US$1,650/oz.”

Nevertheless, “there are still plenty of reasons to believe that gold trading will favor the upside over the longer term,” wrote Christopher Lewis in an article for FX Empire. The first reason for this is a continued central bank stimulus around the world. Edward Moya, Senior Market Analyst at brokerage Oanda said to Market Watch: “The global economic recovery will still require further aid and gold prices should still be supported over the medium-term.”

Low interest rates for the foreseeable future are the second reason supporting a bullish outlook for gold. As James Hyerczyk explains in a piece for FX Empire, “gold is an investment that competes with other traditional investments like stocks, bonds, currencies and industrial commodities. Longer-term gold investors really do not have a lot to worry about because we are 100 percent certain the Fed is not going to raise interest rates for years.” The Fed will meet this week to make a decision on interest rates. CNN reports that it “will probably keep interest rates at zero but its own ranks are increasingly clamoring for an unprecedented move: sending rates into negative territory.”

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