GOLD: dropping to $1,670

Information is not investment advice

Easy there

After a “wake-up call” at the end of March, gold has taken a confident upward-looking trajectory. It gradually rose in value from $1,580 to almost $1,750 last week, which made it the apple of the investors’ eyes. Currently, however, it is back down at $1,670, which breaks the previous uptrend and suggests a more lateral, although still volatile, path. What’s going on?

Out of phase

The main reason claimed by most observers when explaining the drop in gold price is the difference between the prices at which the metal was traded for physical delivery contracts in New York and London. As these are the two central markets for the shining metal, they largely “define” how the “universal” price for gold behaves. Therefore, a difference of $70 per ounce between gold futures traded in New York and London is a serious discrepancy. One may say “This difference would quickly go to zero with speculators taking advantage of the situation - what’s the problem for them to buy gold in London and sell in New York at a price $70 higher? That would stabilize gold price and set it back upwards!” Let’s remember we are speaking about futures for physical gold delivery, and that faces a number of problems if we consider linking the two markets in real trade. Even without the coronavirus disruptions, it would be difficult to manage such an arbitrage. Hence, no rapid solution could have been provided – thankfully (for gold traders), the spread between Ney York and London gold prices narrowed to $20 per ounce last Friday.

Outlook

Observers comment that gold is likely to trade between $1,500 and $1,750 within the next two to five years while the world will be on a recovery course. Spikes up to $1,800 and even $2,000 per ounce are expected. Let’s remember that fundamentals are primary factors with gold, and the main fundamental factor for the nearest future will be uncertainty about how/when/whether the world regions will regain their powers and capacities. For gold, that should be almost like a guarantee for rising higher.

Therefore, the current channel between $1,670 and $1,700 where the gold price is currently contained is likely to be a temporary sideway stop before a possible further increase in value. However, keep in mind that, although $2,000 was voiced out as a possible mark, $1,700 - $1,750 is in the higher range of the predicted performance area. For this reason, expect frequent breakouts from this upper level down to $1,600 - $1,650 in the long run.

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