It would seem that at a time when prices of most food and industrial goods are rising, the price of gold should also be heading north. Why should gold go down when everything else is going up in price? And yet… it’s down $100/oz year-on-year. Gold is not just a store of value to protect us from inflation, it is an equally important industrial metal and is subject to economic laws like any other raw material. It is also subject to speculation.
- Gold is often seen as an investment safe haven and store of value, it is also a productive commodity and is subject to the same economic laws.
- investors who hoard or dispose of gold in the market can create temporary imbalances that lead to sudden price changes.
- the market chooses safe forms of capital investment and it will not always be gold.
What are the fundamentals?
One reason for gold price movements is speculation. Investors speculate on what governments and central banks are going to do and then act on those predictions.
As an example, in 2014, gold prices fell when the Federal Reserve announced it was ending its controversial stimulus programme ( Quantity Easing) following the 2008 financial crisis.
Recent announcements of FED Chairman J. Powell about the necessity to quickly end the asset purchases and possibly normalise the monetary policy (read: start raising interest rates), undoubtedly weakened gold’s position as an asset protecting against inflation.
Given that the FED is gearing up to fight inflation, perhaps it is worth looking at gold less favourably? If the FED keeps its word and inflation levels start to fall it will make gold cease to act as a hedge against rising prices.
Add to that the fact that the red-hot stock market is tempting to transfer capital so far invested in non-yielding gold to high-yielding equities. Why sit on the sidelines with capital invested in an inert, shiny metal when other investors (at least temporarily) get rich buying shares and cryptocurrencies?
And what does the Technical Analysis say on this?
So, let’s look at the current chart of Gold and try to answer the question asked in the title, i.e. what can happen on this instrument in the nearest future.
Analyzing the daily chart according to the PA+MACD strategy rules, I notice a certain regularity in the behavior of Gold prices. When a bearish engulfment appears and the price breaks out of the formation at the bottom – the MACD indicator changes its direction to a downward one, heralding a few more downward days. Today we again saw a downward breakout on the daily chart and the MACD is already in a downward phase. The conclusion is obvious – this could be the beginning of another wave of declines.
The nearest target for supply is the support of the channel and perhaps even lower support and resistance level 1756. It is important to remember about Friday’s data from the labour market – popularly known as “payrolls”. This data will have an impact on future Fed decisions.
The above analysis is based on the PA+MACD strategy, a detailed description of which you can read HERE .
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