Investment News: the yellow metal continues to shine

We have seen this pattern before: the price of a security jumps to a fresh high, stays there for some time oscillating around it and then decides to jump higher again. The staircase graph as a result often indicate a bullish pattern, as is the case for gold today. The shiny metal has broken out of the 1700-1760$ per ounce corridor and has printed a new high for this year at 1774$ per ounce.

Gold demand and supply

Yet, the demand for physical gold is expected to collapse with almost 20% this year, reported by Bloomberg as the supply brought to the market by people recycling their jewelry is also expected to climb by 8% or more. Central banks in general are buying less today, this is where the bad news stops. Because of Covid-19, gold mines have been partially shut and the supply is expected to drop by 5% at least. But most important, demand from the financial sector continues to grow unabated.

The impact of money printing

In investment portfolios, gold is increasingly taking the place of bonds as the latter yield zero or even negative returns. In fact, gold has taken allure as a refuge asset. The biggest driver however remains the monetary situation which is unprecedented. The balance sheets of the world’s biggest central banks keep swelling as they scoop up bonds of all sizes and nature. The massive money creation is huge and risks debasing the currencies of the countries where central banks are printing money. The recent weakening of the greenback is, according to several strategists, proof of all this. The relationship between the price of gold and the size of the balance sheets of the central banks is striking as it is between gold and the global average real yield for global government bonds.

Different factors driving the price upwards

Last but not least, notwithstanding surprisingly good PMI data yesterday, the ongoing growth in the number of virus cases and the risk of fresh lockdowns is keeping a firm bid for gold. The uncertainty be it regarding geopolitical tensions or the upcoming US elections in November will most likely keep the interest in gold very much alive.

As we move higher the past record price of gold in USD, i.e. 1921$ per ounce, will start to draw like a magnet. That level is around 9% higher. But first I guess we might to need to dwell around the current level a bit longer, before we move to a higher step on the ‘staircase’. It only underscores the fact that some investors will remain buyers on weakness.