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Gold hurtling towards all-time high amid perfect storm
GOLD prices have powered to a seven-year high and are now within striking distance of the US$1,800 an ounce psychological mark - fuelled by a perfect storm of renewed pandemic fears, hopes of more stimulus for waning economies and geopolitical concerns over China's national security law in Hong Kong.
Spot gold rose as high as US$1,789.28/oz in Asia trading on Wednesday, after gold futures cracked an eight-year record of US$1,800/oz overnight on Tuesday as demand surged for the safe-haven hedge in uncertain times.
"It's an impressive feat," said Stephen Innes, chief global market strategist of AxiCorp. In addition to stimulus from governments around the world, he cites two other factors that may have fuelled the precious metal's ascent for much of this year.
"Specific stimulus could provide a reflation tail wind to the global economy and most portfolios are under positioned for inflation. So, they are left with two options: buy TIPS (Treasury Inflation-Protected Securities) or gold.
"The other is stock market valuations that remain out of sync with economic reality. It's worth putting some hedges on into the summer doldrums of July and August when market liquidity turns challenging and stocks could be in for a bumpy ride," he explained.
TD Securities agrees with Mr Innes on the inflation factor. "For the moment, price action continues to support our view that the yellow metal's trading regime is shifting from a safe-haven asset to an inflation-hedge product. Looking forward, we also see substantial room for this driver to run," said TD in a recent report.
The renewed spread of Covid-19 in the US, the world's largest economy, is also acting as a support for gold prices. Some states have scaled back their reopening and resumed shutdowns given the surge in cases.
"It is clear that Covid-19 still has a firm grip on the US, with a real risk that its economic recovery could be derailed," said Oanda's senior market analyst Jeffrey Halley. Ongoing geopolitical tensions between the US and China, between China and India, and in Hong Kong, have not helped. US-China tension has worsened since Beijing passed a new national security law in Hong Kong."That has led investors to add gold to their portfolios to hedge risks," he added.
Amid the "extraordinarily uncertain" climate, as US Federal Reserve chair Jerome Powell put it earlier this week, dovish central banks are expected to roll out more stimulus measures to cushion the pandemic-led economic shock. This has meant declining real interest rates, which have been a powerful bullish force for the bullion.
In addition, Phillip Futures' Avtar Sandu said in a report: "Gold is a safe haven as currencies are being devalued by massive stimulus programmes introduced by central banks and governments around the world to alleviate the worst of the Covid-19 outbreak. This has increased investment demand of gold to hedge against the debasement of fiat currencies."
But while the precious metal's testing of the tough multi-month resistance zone of US$1,800/oz has sent the market into a tizzy, some experts say the current rally could run out of steam - not least because it is fuelled by news headlines. Something more is needed for gold to cross that key point.
"Technical resistance is formidable here and gold is lacking the momentum, for now, for that level to be breached this week," said Oanda's Mr Halley. He does, however, see this happening in the next week or two.
In the bigger scheme of things, gold's fundamentally bullish story is expected to remain intact given the delicate climate on the economic and political fronts. But do pundits expect the herd of bulls to push the bullion to 2011's all-time peak of over US$1,900/oz? Depending on who you ask, the answers vary.
"Technically, it has broken above an 'Ascending Triangle', which is a bullish signal. This has opened room for more upside. (But) the roadmap to the current all-time high - set in 2011 - could be bumpy as several key resistances lie ahead," said Margaret Yang, strategist at DailyFX.
Hitting the all-time high is possible if gold surpasses the "true resistance" mark of US$1,800/oz. "Once that is surpassed, US$1,900 will only provide fleeting resistance as gold moves to US$2,000/oz and higher," said Mr Halley.
But 2021 could be the best year yet for the yellow metal. Thomas Schroeder of Chart Partners said: "Gold will have a much better year in 2021 when liquidity support for equities fades and risk aversion comes to the surface. Bottom line - trade a rise now, reduce and buy a pullback in the third quarter for a bigger move higher to clear that 2011 high. I would not be surprised to see gold at US$2,400/oz in 2021. Bullish!"