Price of Gold Fundamental Weekly Forecast – Vulnerable to Stock Market Weakness
Gold posted its biggest weekly gain since 2008, helped by a dramatic plunge in the U.S. Dollar which drove up foreign demand for the precious metal. The dollar fell after the Federal Reserve announced massive stimulus and Congress approved a historic financial rescue package. Both moves have the potential to flood the global economy with U.S. Dollars. The moves also relieved pressure on the credit markets, encouraging investors to dump U.S. Dollars held as safe-haven assets.
Last week, June Comex gold settled at $1654.10, up $166.00 or 11.16%.
In the first paragraph, “dollar” was mentioned four times. This is because gold’s rally was primarily driven by the weaker U.S. Dollar. It has nothing to do with safe-haven buying of the precious metal. Remember gold is an investment and not a safe-haven asset.
To those that think gold went up because of demand for protection against the expected damage from the coronavirus on the global economy, I only have to point to the S&P 500 Index, which rose 10.26% last week as investors were attracted to risky assets.
Both rallies were driven by the loosening of credit by the Fed and all the other major central banks that pledged financial support.
It was also interesting to note that once again, gold was locked onto stocks. This high correlation is being fueled by margin call fear. We’ll know when the markets have returned to normal when gold and stocks become negative correlated. Until the fear of a credit crunch goes away, however, both are likely to remain positively correlated.
Also helping to boost gold prices this week was a problem with the physical supply of gold as virus-led lockdowns stalled supply chains. Physical gold dealers struggled to meet surging demand for gold last week as the pandemic choked global supply chains, while massive discounts were offered in India amid a lockdown.
This problem was eventually fixed when the CME Group, which owns Comex, announced the initial listing of enhanced delivery gold futures that will be deliverable in 100-ounce bars, 400-ounce bars, or kilo bars, effective April 6.
Weekly Forecast
Another flight to cash to cover losses in equities could weigh on gold prices this week despite measures by global central banks to contain the economic fallout from the coronavirus epidemic.
The worse the global economy gets the stronger the link between stocks and gold. This is because a prolonged pandemic would lead to recession and a cascade of bankruptcies and emerging market debt defaults that would send stock prices plunging. Investors would need to sell gold to raise cash to cover their losses in the stock market.
This article was originally posted on FX Empire
