This gold rush will end well before $3,000
This has been one difficult year for most - but it’s definitely been a great one for gold (and gold owners). It has seen exponential growth to the point where its holders are in a state of euphoria with the feeling that they can do no wrong and their safe haven will last forever.
Before we get ahead of ourselves, let’s not forget the “gold rush” of 2011. It was on the pages of magazines and newspapers, it was the talk of taxi drivers, personal trainers and hairdressers. Gold investments were indeed the opportunity. But over the months and years thereafter, the rush died down.
A similar situation happened at the end of 2017 with Bitcoin. A once dodgy unknown coin, used by tech geeks and criminals, it became a rockstar. Again, this was the main topic among friends, at birthday parties and your aunt’s house, where you once only talked about politics and the weather. When the coin was at $18,000, everyone was convinced it would soon hit $100,000. Alert - it didn’t.
Overexposure kills the buzz
The popularity of an instrument is not the cause of its demise, but an exaggerated hype around an asset is a red flag that appeals to the part of my brain that’s responsible for making investment decisions. The way I see it, by the time something has made it to the cover story, it’s usually too late to invest in it.
Smarter traders have already done that, and pushed it to its peak. Now they’re looking for a way out, leaving space for the less experienced and more emotions to jump in.
The $3,000 marker
Now back to gold; will it hit $3,000? Perhaps, but frankly I wouldn’t hold my breath. I am myself a big fan of gold, I’ve invested in physical gold bars and I trade the CFD (contract for difference) on my forex platform.
I think gold price movements are technical and follow fundamentals in an understandable way, making it a preferred tradable instrument. That can be really rewarding with a proper strategy and risk management. But I still don’t think it will hit $3,000 anytime soon. Why?
Firstly, it’s already had its highs. Secondly, the reason gold has risen over the past months can easily be explained through fundamentals: uncertain times due to the COVID-19 outbreak and a weaker dollar. Both reasons will come to pass.
A cure and then?
The pandemic will be over. More than likely, we’ll find a cure and everything will go back to normal, eliminating the need for capital protection in safe havens. Traders will move to something riskier.
Also, currently gold is protecting us against inflation, which traders fear with all the unprecedented stimulus from central banks. We can’t forget though, that there are other instruments that can do that, like stocks (check the stock exchange in Venezuela and their inflation). And stocks will be a more favorable option in a risk-on mode.
A dollar revival
The second reason is the weak dollar. But a weaker greenback has historically led to a spike in commodity prices, because they are quoted against the dollar. When the dollar goes down against the euros, it means that with less euros we can buy more gold.
That increases demand and hence the price of gold. It’s that simple. Can the dollar stay weak forever?
Technically it could, but that’s a very unlikely happenstance.
The dollar has been struggling since May, but it should regain its power in the second-half of the year. If it does, it will negatively affect the price of gold, making the $3,000 mark less achievable.
To conclude, experience tells me that we are close to a correction in the price of gold rather than another bullish wave. I don’t intend to open short positions on gold. But I’m also not comfortable opening long ones either, when gold is so close to all-time highs.
- Tomasz Wisniewski is Director of Research and Education at Axiory Global.