Keeping An Eye on the Price of Gold

The price of gold moves in a surprisingly tight range given the recessionary conditions affecting global markets. During the last two months, it moved between a one hundred dollar range, measured from top to bottom.

Everything around experienced high volatility levels – yesterday, the equity markets in the United States plunged again. Fiat currencies register higher average trading ranges due to the uncertainties of the coronavirus crisis.

When one thinks of the safe-haven qualities attributed to gold, why does it still range in the time of the biggest economic recession, possibly depression, of our lifetime?

Bullish and Bearish Arguments

On the bullish side, one explanation is that the current $100 consolidation takes place around the recent highs. As the gold price broke higher way before the pandemic (June 2019), bulls argue that it is simply taking its time before the next leg up. After all, the current consolidation takes place close to the recent highs.

Also on the bullish side, many voices call for a large depreciation of the USD due to the Fed’s measures. By flooding the market with dollars, the Fed created one of the fastest drops ever in the USD – dollar sentiment reached low levels not seen since 2011. A lower dollar implies a higher XAUUSD – gold denominated in USD.

Bears, on the other hand, see stabilized real rates and improved economic visibility. A move towards $1500 (from the current $1700) should not be out of cards on the short-to-medium, albeit the long-term perspective remains bullish.

If history tells us something, it shows that gold outperformed most of the fiat currencies for quite some time now. The price of gold denominated in EUR, USD, GBP, CAD, CNY, JPY, CHF, and INR, rose in the last seventeen years between 7.8% (against CHF) to 13% (against INR).

To many investors, it may not seem like a lot. That is especially true if one compares the equity market return in a similar period.

However, gold has its place in a portfolio. It acts as a safe-haven, diversifying the portfolio exactly when the investors need it the most. When equities fall as they did during the coronavirus pandemic, a rising or stable asset in a portfolio brings stability and equilibrium.

Also, the Dow to gold ratio often indicates fake rallies in the stock market when the price of gold holds steady or even rises. If we judge by what happened the other day with the DJIA, we should all keep an eye on the price of gold.

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