Gold’s glittery high, but where can it go next?
The gold price has finally followed in the footsteps of US stock markets and is surging towards a record high. It broke above the key $1,800 per ounce level earlier on Wednesday, and rose to an intra-day high above $1,816, before pulling back towards the end of the US session. What does this multi-year high for the gold price tell us, and is it a bullish signal or time to sell?
Gold vs. the Nasdaq
The comparison with US stocks is worth probing further and below we compare the gold price with the world’s largest tech index, the Nasdaq 100. The top 8 companies in the Nasdaq are worth more than $5 trillion; one tonne of gold is worth approximately $63.5 mn, at a price per ounce of $1,800, there are estimated to be more than 150,000 tonnes of gold in above ground stocks only, which makes the current approximate value of all the above-ground stocks of gold worth a very approximate $9.5 trillion. This means that the value of all of the world’s gold, is significantly more than the value of the all of the companies in the world’s largest tech index.
So far, gold looks like a good bet, especially when you consider that the above calculation does not include all of the world’s stock of gold including that which has yet to be mined and come out of the ground. However, gold does not pay dividends, gold is not easy to store, and it has no inherent value. Now some jokers out there may argue that some of the tech firms have little inherent value either, but for an asset that literally yields nothing, and costs money to hold, on face value it seems fairly over-valued. This is why, when compared to the Nasdaq, gold doesn’t hold up too well. This goes some way to explain why stocks and gold have been rising in tandem in recent months. However, there are good reasons why investors are plying into gold and why it could move higher from here.
Reasons to be bullish on the gold price
· Central banks: major central banks in Europe, the US, the UK and Japan have poured trillions into their economies to try and protect them from the worst effects of the coronavirus. This massive increase in the global money supply, should erode the value of the world’s major currencies, which is one reason why gold (and the Chinese renminbi) have surged this week.
· Federal and government spending: governments across the world have also boosted spending in recent months to protect jobs and businesses from the enforced lockdowns caused by the coronavirus. High global debt levels can lead to unstable economies in the future, which also boosts gold’s attractiveness as a safe haven outside of government and central bank control. This is one reason why bitcoin followed the gold price higher on Wednesday.
· Inflation: gold is the ultimate inflation hedge. Eventually, the surge in government spending combined with the boost to the money supply should lead to rising inflation rates, although that may seem some way off when you look at current price levels around the world. Thus, investors could be betting on a wave of inflation coming down the line.
· The dollar: the USD and gold are intricately linked. When the dollar rises the price of gold tends to fall, and vice versa. Thus, the sharp decline in the dollar index since March could also be driving the gold price higher.
· Technicals: the technical picture is also supportive of the gold price right now. The MACD looks supportive of further gains, and while the RSI is in overbought territory, it could stay there for some time before prices start to come off. The gold price shows no sign of losing momentum on the monthly chart.
This is a strong check list in favour of further gains for the gold price. While there could be some setbacks, we believe that the gold bulls will now be targeting a rise towards the all-time high of $1,921 in the second half of 2020.