Gold renewed its all-time-high record on Wednesday, only a week or so after breaking its previous record. The price of gold now stands at $2,000 dollars, a real milestone that readies investors for the potential of prices in the $2-3k range in future, but is a continued rally something we can expect?
As we stated previously, gold is on one of its longest price rallies in history, continuing from 2018 and expecting to consolidate somewhere in 2020, the COVID pandemic acted as a nitrous kick to revive the tail-end of the rally. Now, we see ourselves coming to the end of the first pandemic shock wave – having been through March, where most companies watched their shares haemorrhage in value, and a June where we saw something of an over-exuberant recovery.
What we need to figure out next, is whether there will be a second, equally disruptive spike in cases, or whether other risk factors might contribute to a prolonged gold rally.
Gold price risk factors
A key pressure with either downward or upward pressure is the US NFP data release, which, if it confirms another reading, could strengthen the dollar and put downward pressure on gold. However, despite seemingly manageable initial unemployment data, US jobless claims indicate that the country are sauntering off of the recovery track, and without swift action by the Fed, this could strengthen gold-buying activity. Also, any Fed assistance would likely come in the form of lowering its interest rates or extending its asset-buying programme, both of which would likely stimulate gold prices.
Further, and despite some initial signs of recovery, we can always rely on the political newsreel to rock the boat. As stated by Chief Currency Analyst at HYCM, Giles Coghlan:
“Stock markets may be making modest daily gains but the chance of a second outbreak of cases, which seems to be increasingly likely, could result in these gains being lost. What’s more, we shouldn’t forget that there are some big-ticket events on the table for the rest of 2020, including the US Presidential election, Brexit and the ongoing US-China trade war. These will all have significant implications on the financial markets depending on how they play out. As a result, investors are taking a conservative approach by reducing their risk exposure.”
How should we approach gold?
Naturally, gold is a game of volatility. If sentiment indicates uneasiness and uncertainty, then gold tends to flourish. The key takeaway about how markets are affected by pandemics – more so than by orthodox economic downturns – is that they’re entirely shaken by the fact that they can’t control a virus. Not only are pandemic responses largely at the behest (or mercy) of political figureheads and the services they commission, but the potential -as we’ve seen – for illnesses to resurge and take a second pass at societies and markets, gives them both long-lasting potential, and the ability to truly spook investors.
If you’re feeling unsure about the exact nature of market sentiment, or sentiment in the US market, it might be worth looking towards the Chicago Board Options Exchange’s CBOE Volatility Index, which offers real-time market expectations of volatility based on S&P 500 options.