The price of gold has rebounded from below $1,700 at the start of April and recovered over $200 in the meantime. The all-time high established in 2020 is in danger of giving way should the price break above $1,950 and inflation keeps rising.
One of the stories that made headlines during the pandemic year was the price of gold reaching a new all-time high above $2,000. As investors looked for the yellow metal’s safety, the break above $2,000 seemed to be just the start of a new, more sustained, bullish trend.
Even Warren Buffett, the legendary investor, invested in gold in the midst of the pandemic. Yet, after posting that all-time high, the price of gold dropped several hundred dollars until it found a bottom below $1,700.
The $400 dollars drop took place over an eight-month period. Most of that time, the US dollar lost ground against its G10 peers, leading to one of the most interesting divergences seen during the pandemic.
Still, despite the decline, gold as a financial asset performed well in 2020. It gained against all major currencies, setting a record-high against the US dollar at $2,067 and gained 24.6% on the year.
And then inflation fears mounted.
Inflation Fears Trigger Gold’s Bullish Momentum
During the pandemic, all central banks and most governments reacted in a similar manner. By providing monetary and fiscal support, they leveled the playing field in financial markets. Suddenly, there were no divergences in monetary policies to speculate on. As such, the correlation between financial assets tightened.
Now that central banks prepare to remove some of the stimulus, it is time to see how the price of gold reacts. From a technical perspective, it recovered in April 2021 once inflation data in the United States picked up much stronger than the market expected.
From a technical perspective, the bearish arguments are still valid, despite the recent rise from the lows. The price action formed a series of lower highs that remained in place since the middle of last year.
However, a move above $1,950 breaks the series and will likely trigger expectations for an attempt to a new high. Tomorrow’s inflation data in the United States is key for the medium to short-term price action in gold. Higher than expected inflation might push the price of gold closer to the round $2,000 number.