What's keeping gold up?
Gold’s left plenty of traders scratching their heads lately. The relative strength of everyone’s favourite shiny rock is a real puzzle.
Conventional market wisdom and fundamentals all point lower yet gold has stubbornly refused to fall in line with the bond selloff.
There’s no suggestion that gold is doing exceptionally well (it is slightly down on the year after all). It’s more the case that it hasn’t done as terribly as would be expected given the performance of other assets that frequently serve as a benchmark for gold valuation.
Market theory in effect… In theory, as US bond yields rise, gold should lose some appeal. Why hold a zero yielding asset when other assets offer better returns/yields?
Sounds logical… Didn’t happen.
As bonds in the US and Germany have sold off since the end of last year (sending bond yields higher), gold is still treading water as the chart below shows:
Even the negative yielding bonds (Such as Germany’s 10 year bund) are starting to offer positive yields.
Again, it seems logical that government bonds will be less volatile than the price of gold over a ten-year period, so zero yielding bonds should appeal more than zero yielding gold.
All of these ‘logical’ market assumptions are being tested now. What’s that saying about logic and markets not being good partners?
The other justifications that would usually be supportive for gold are also weaker. One strongly held belief is that gold provides a safe haven: a store of value against currency debasement by the central banks.
Fundamental misunderstandings of QE as money printing led many to believe that the currency was indeed being debased, yet during the ‘Peak-QE’ period last year, gold underperformed as equities and riskier assets were favoured. (QE isn’t ‘money-printing’, it’s an asset-swap, but that’s a topic for another day)
As central banks wind down their QE programs, currency debasement by money-printing isn’t really a strong justification for owning gold either.
Protection against debasement by inflation is perhaps the only one you could make a solid case for, but even then it begs the question… Why care about that now when inflation is expected to slow from these levels?
Many of the strong arguments for holding gold just don’t ring true right now. Yet here it sits, just above the 20 & 200 day moving averages, inanimately mocking anyone who dares call for its demise…
One area I’ve earmarked on the chart is the dotted level just below $1850. If gold breaks out from the local range, pushes above $1833 and holds to the upside of those two moving averages, trend followers could be tempted in, looking for a move higher.
However, caution is warranted until the $1850 level is cleared. We saw a similar pattern play out last year:
After selling off from the 1877 to 1966 zone, price formed a new range between 1721 & 1833. Traders who bought the breakout of this range looking for higher prices initially got their wish. But the failure to push on beyond 1877 saw selling take command pushing price back to the 1761 zone.
To sum up; when the fundamentals make no sense, price is usually king. Gold exemplifies this perfectly right now.
Not investment advice. Past performance does not guarantee or predict future performance.
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